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  • 1984

    • 84-73 Proposed Amendment to the Uniform Practice Code to Require Prompt Settlement of Syndicate Accounts

      TO: All NASD Members and Other Interested Persons

      ATTN: Syndicate Department

      As a result of a recommendation of the Advisory Council of the Board of Governors of the Association, the Corporate Financing Committee has recently considered the need for more prompt settlement of syndicate accounts in distributions of corporate securities. Syndicate accounts are ordinarily formed by underwriting groups to process the income and expenses of the syndicate. After consideration of the matter the Committee concluded that the problem of delays in the settlement of syndicate accounts which the industry has been experiencing should be addressed through establishing a period within which syndicate accounts must be settled. The Committee recommended to the Board, with the agreement of the Uniform Practice Committee, that the Uniform Practice Code be amended to require syndicate managers to settle syndicate accounts within 120 days of the date securities are delivered by the issuer to or for the account of syndicate members. The Committee determined to review this matter one year after adoption of the proposed rule with a view to reducing that time period to 90 days.

      The Board of Governors has approved the recommendation of the Committee and is publishing a request for comment by the membership on the proposed amendment to the Uniform Practice Code. Attached to this Notice is a proposal to amend the Uniform Practice Code by adopting a new Section 66 which would require the settlement of syndicate accounts within 120 days. One year after adoption of the rule, the Committee will review the experience under the 120 day requirement with a view to reducing the time period for required settlement to 90 days.

      All comments pertaining to this proposal should be made in writing to James Cangiano, Secretary, National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C. 20006 and be received on or before January 28, 1985 in order to receive consideration. Questions regarding the proposal may be directed to Harry E. Tutwiler or Suzanne E. Rothwell of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Proposed New Section 66 of The Uniform Practice Code

      • • • •

      Section 66

      Settlement of Syndicate Accounts

      (a) Definitions
      (1) "selling syndicate" means any syndicate formed in connection with a public offering to distribute all or part of an issue of corporate securities by sales made directly to the public by or through participants in such syndicate.
      (2) "syndicate account" means an account formed by members of the selling syndicate for the purpose of purchasing and distributing the corporate securities of a public offering.
      (3) "syndicate manager" means the member of the selling syndicate that is responsible for maintenance of syndicate account records.
      (4) "syndicate settlement date" means the date upon which corporate securities of a public offering are delivered by the issuer to or for the account of the syndicate members.
      (b) Final settlement of syndicate accounts shall be effected by the syndicate manager within 120 days following the syndicate settlement date.

    • 84-72 Expansion of NASDAQ National Market System

      TO: All NASD Members

      The SEC Release of December 18, 1984

      On December 18, 1984, the Securities and Exchange Commission issued Release No. 34-21583; File No. S7-787, entitled "Designation of National Market System Securities." This Release confirms the decision taken by the Commission at an open meeting on November 16, to approve the following additional criteria for the voluntary inclusion of securities in NASDAQ/NMS:

       

      Operating Companies

      Development Companies

      Capital & Surplus

      $1 million

      $8 million

      Net Income

      $300,000 in latest or 2 of last 3 fiscal years

      --------

      Operating History

      --------

      4 years

      Market Value of Float

      $2 million

      $8 million

      Minimum Bid

      $3

      --------

      Number of Market Makers

      2

      2

      "These (additional criteria) make a total of approximately 2,500 OTC securities eligible for NMS designation," the SEC Release stated.

      The NASD's Implementation

      The effective date for the SEC Release is January 22, 1985. On that date, the NASD will add 100 securities which meet the new criteria to NASDAQ/NMS. Thereafter, the NASD will add securities to NASDAQ/NMS at a rate of up to 200 a month, until all eligible securities seeking NMS designation are included.

      The NASD Proposal

      The new criteria approved by the Commission were proposed by the NASD on February 10, 1984 as amendments to the Commission's own criteria, which include a $5 bid price, a trading volume of 100,000 shares a month for six months and four market makers. The NASD stressed that its financial criteria, such as the profitability of operating companies and the depth of resources of development companies, are more important to investors than the temporary trading volumes of stocks.

      On April 30, 1984, the Commission published the NASD's petition. It received 347 letters of comment, including 215 from OTC issuers and 113 from broker-dealers. The December 18 Release observes, "The NASD and the vast majority of OTC market participants fully supported the proposed amendments." The Release also notes that five stock exchanges were among the opponents, and it carefully cites the NASD's point-by-point rebuttals of the exchanges' arguments.

      "After careful consideration," the Release says, "the Commission has determined to adopt the ... criteria proposed by the NASD, thus expanding the number of securities eligible for designation. The Commission believes that the institution of last sale reporting in the OTC market has been extremely successful and should be expanded ... Specifically, the Commission believes that this expansion is justified because it provides additional OTC securities with the benefits of last sale reporting."

      The Impact on Marginability

      A further benefit of the SEC decision is that more NASDAQ securities will become eligible for purchase in margin accounts. Currently, there are 2,070 NASDAQ margin stocks. The Federal Reserve Board ruled in September, 1984, that all NASDAQ/NMS securities are to be automatically marginable, and the expansion of NMS will make more than 700 additional NASDAQ securities eligible for margin. This will give investors greater flexibility and will help issuers by making their securities more attractive to a broader range of investors.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-71 SEC Rule 15c2-2 Fully Effective

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO; All NASD Members

      As discussed in Notice to Members 83-73, the Securities & Exchange Commission adopted Rule 15c2-2 on November 18, 1983. The Rule prohibits broker-dealers from using mandatory arbitration clauses in customer agreements that purport to bind public customers to the arbitration of claims arising under the federal securities laws. Those clauses, in the view of the Commission, are inconsistent with the deceptive practice prohibitions of Section 10(b) and Section 15(c) of the Act.

      The Rule, which is reprinted below, sets forth a transitional period, during which broker-dealers could use existing supplies of customer agreement forms until December 31, 1984, provided they were accompanied by a separate written disclosure specified in the Rule.

      In addition, broker-dealers whose customers had signed agreements that would violate the Rule were required to send the written disclosure to all active, existing customers no later than December 31, 1984. Active customers are defined as those for whom, after July 1, 1983, the broker-dealer carried a free credit balance, held securities for safekeeping, or effected a securities transaction. All other customers must be sent such disclosure upon the completion of their next transaction.

      This Notice is to remind members that the transition period has almost ended, and that after January 1, 1985, no new customer agreement forms may contain provisions that purport to bind the customer to arbitrate future disputes arising under the federal securities laws.

      Please direct any questions concerning SEC Rule 15c2-2 to Jean McNeill, at (202) 728-8286.

      Sincerely,

      Frank JY/Wilson
      Executive Vice President and General Counsel

      Attachment

      TEXT OF RULE 15c2-2

      Disclosure regarding recourse to the
      courts notwithstanding arbitration
      clauses in broker-dealer customer agreements

      (a) It shall be a fraudulent, manipulative or deceptive act or practice for a broker or dealer to enter into an agreement with any public customer which purports to bind the customer to the arbitration of future disputes between them arising under the federal securities laws, or to have in effect such an agreement, pursuant to which it effects transactions with or for a customer.
      (b) Notwithstanding paragraph (a) of this section, until December 31, 1984 a broker or dealer may use existing supplies of customer agreement forms if all such agreements entered into with public customers after December 28, 1983 are accompanied by the separate written disclosure:
      Although you have signed a customer agreement form with FIRM NAME that states that you are required to arbitrate any future dispute or controversy that may arise between us, you are not required to arbitrate any dispute or controversy that arises under the federal securities laws but instead can resolve any such dispute or controversy through litigation in the courts.
      (c) A broker or dealer shall not be in violation of paragraph (a) of this section with respect to any agreement entered into with a public customer prior to December 28, 1983 if:
      (1) Any such public customer for whom the broker or dealer has after July 1, 1983 (i) carried a free credit balance, or (ii) held securities for safekeeping or as collateral, or (iii) effected a securities transaction is sent, no later than December 31, 1984, the disclosure prescribed in paragraph (b) of this section; or
      (2) Any other public customer is sent upon the completion of his next transaction pursuant to such agreement, the disclosure prescribed in paragraph (b) of this section.

    • 84-70 25 Stocks Added to the Small Order Execution System (SOES)

      TO: NASD Members and NASDAQ Level 2 and Level 3 Subscribers

      Effective December 21, 1984, an additional 25 NASDAQ National Market System (NASDAQ/NMS) securities will begin trading in the Small Order Execution System (SOES). SOES began successfully on December 14 with over 66,000 shares in 25 different stocks traded during the first day of operation. (A list of those securities is contained in Notice to Members No. 84-63 dated November 22, 1984) In SOES, customer directed agency orders of 500 shares or less may be executed automatically with SOES market makers at the "inside" or best price in the NASDAQ System at the time of execution.

      Beginning in 1985, the universe of SOES stocks will be expanded to include all NASDAQ/NMS and eventually all NASDAQ securities. For more information on SOES, including the procedures which must be followed to register as a SOES market maker or order entry firm, please contact Robert Soos, Supervisor, SOES Operations Center, at (212) 839-6210.

      ADDITIONAL SOES SECURITIES
      (Effective December 21, 1984)

      NASDAQ Symbol

      Company Name

      AACOB

      Adolph Coors Company

      AITX

      Automatix Incorporated

      ALWC

      A. L. Williams Corporation (The)

      CMPQ

      Compaq Computer Corp.

      CRAB

      Capt. Crab, Inc.

      DYSN

      Dysan Corporation

      ELPA

      El Paso Electric Company

      ENER

      Energy Conversion Devices, Inc.

      FINX

      Fingermatrix, Inc.

      INCM

      InteCom, Inc.

      KNDR

      Kinder-Care Learning Centers, Inc.

      LIZC

      Liz Claibourne, Inc.

      MAXI

      Maxicafe Health Plans, Inc.

      MCCRK

      McCormick & Company, Inc.

      NDTA

      National Data Corp.

      NIKE

      Nike,Inc.

      NSCO

      Network Systems Corp.

      NWPH

      Newport Pharmaceuticals International, Inc.

      PANS

      Pansophie Systems, Inc.

      PCLB

      The Price Company

      QMSI

      QMS, Inc.

      SBAR

      San/Bar Corporation

      SHAS

      Shawmut Corporation

      SMED

      Shared Medical Systems Corp.

      XICO

      Xicor, Inc.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

    • 84-69 Offshore Shell Bank Licenses Registered in Majuro, Marshall Islands

      IMPORTANT

      PLEASE DIRECT THIS NOTICE TO ALL SALES, COMPLIANCE AND CREDIT OFFICERS AND PARTNERS

      TO: All NASD Members and Other Interested Persons

      Attached are copies of notices issued by the Comptroller of the Currency that relate to certain direct obligations that either may be worthless or have not been honored by a number of offshore bank licenses registered in Majuro, Marshall Islands. Because the NASD understands such checks have been used to open accounts with broker/dealers, in order to avoid undue risk of loss, members should exercise extreme caution prior to any financial involvement with these entities.

      The NASD has been informed that there is no affiliation between Sterling Bank and Trust Company of Majuro, Marshall Islands which is referenced in the attached notice as not honoring its obligations, and Sterling National Bank and Trust Company, 540 Madison Avenue, New York, New York.

      Questions concerning this notice may be directed to I. William Fishkind, Assistant Director, Surveillance Dept. at (202) 728-8405.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

      Attachments

      BANKING ISSUANCE

      Comptroller of the Currency Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officers of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: Trans-Pacific Commerce Bank, Ltd.
      Majuro, Marshall Islands 96960

      This Office has received information that certain direct obligations on the subject entity may be worthless and that this entity may be operating illegally in the United States. Any information which you may have regarding the subject should be brought to the attention of:

      Enforcement and Compliance Division (202-447-1818) Office of the Comptroller of the Currency Washington, D.C. 20219

      C.T. Conover
      Comptroller of the Currency

      BANKING ISSUANCE

      Comptroller of the Currency Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officers of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: Sterling Bank, & Trust Co.
      Majuro,Marshall Islands 96960

      This Office has received information that certain direct obligations on the subject entity have not been honored. It is recommended that extreme caution be exercised when any involvement with this entity is contemplated. Further, we have been informed by Sterling National Bank & Trust Co., 540 Madison Avenue, New York, New York, that it does not have any bank office in Majuro, Marshall Islands, and that there is no affiliation with Sterling Bank & Trust Co. of Majuro. Any information on the subject entity should be reported promptly to:

      Enforcement and Compliance Division (202-447-1818) Office of the Comptroller of the Currency Washington, D.C. 20219

      C.T. Conover
      Comptroller of the Currency

      BANKING ISSUANCE

      Comptroller of the Currency Administrator of National Banks

      Type: Banking Circular

      Subject: Offshore Shell Banks

      TO: Chief Executive Officer? of National Banks; all State Banking Authorities; Chairman, Board of Governors of the Federal Reserve System; Chairman, Federal Deposit Insurance Corporation; Conference of State Bank Supervisors; District Deputy Comptrollers; Examining Personnel

      RE: Offshore Shell Bank Licenses Registered in Majuro, Marshall Islands

      This Office has received information that 101 offshore shell bank licenses have been registered in Majuro, Marshall Islands. To avoid a possible undue exposure to loss, it is recommended that a careful verification of the financial integrity of all parties concerned, including the licensed entity, be made before an involvement occurs. Information about any questionable transaction should be brought to the attention of:

      Enforcement and Compliance Division (202-447-1818) Office of the Comptroller of the Currency Washington, D.C. 20219

      C.T. Conover
      Comptroller of the Currency

    • 84-68 Amendments to the Uniform Practice Code to Provide for a Liability Notice Procedure and a Liability Notice Form

      TO: All NASD Members

      ATTN: Operations Principals, Cashiers and Buy-In Personnel

      On October 19, 1984, amendments to Sections l(c) and 59(j), "Buy-In Procedures," of the Association's Uniform Practice Code, were approved by the SEC. The Code prescribes the manner in which over-the-counter securities transactions other than those cleared through a registered clearing agency are compared, cleared and settled between NASD member firms. These amendments to the Code apply to transactions between member firms which result in fails.

      BACKGROUND AND EXPLANATION OF AMENDMENTS

      The Uniform Practice Committee has reviewed NYSE Rule 180 and NSCC Liability Notice Procedures, which provide for notification to a broker-dealer which is failing to deliver securities, that it will be held liable for any damages caused by non-delivery of the involved securities. These rules and procedures have been effective in tender offers, exchange offers, mergers, conversions, and reorganization situations by protecting the buyer and placing liability on the seller when damages will result from the non-delivery of the securities.

      The amendments to Section 59(j) of the Uniform Practice Code essentially bring to the over-the-counter securities market a similar liability procedure to that which currently exists for listed issues and those securities issues which are clearing eligible. Basically, these amendments bridge this regulatory gap, and now protect the buyer by providing for notice of liability to the seller.

      It was the Committee's recommendation that any NASD rule combine features found in the NYSE and NSCC rules including the development of a standard liability notice which would state:

      • the time frame for making delivery of the securities.
      • the amount of damages involved, if known, at the time the liability notice is sent.
      • the applicable buy-in procedures, in case of non-delivery.
      • a definite time frame covered by the notice.

      Section 59(j), which is attached as Exhibit A combines features contained in NYSE and NSCC rules and appears as a subsection of Section 59 of the Code, "Buy-Ins."

      Under the new amendments, existing subsection 59(j) is deleted and replaced with new subsection (j), "Failure to Deliver and Liability Notice Procedure." The following is a brief description of the adopted amendments to the Code.

      • Paragraph 1 permits the sending of a liability notice and defines under what conditions a notice may be sent. Also, it sets the minimum time frame for sending liability notices as no later than one business day prior to the expiration date of the offer or event.
      • Paragraph 2 states that a delivering member shall be liable for damages arising from its failure to deliver and that a liability notice shall serve as notice of a claim for damages.
      • Paragraph 3 defines the term "expiration date."
      • Paragraph 4 clarifies the use of buy-ins to close out a contract when the liability notice procedure is not employed.

      The sample Liability Notice (Exhibit B) contains the following information: original trade information, explanation of the offer or event on which liability protection is sought, expiration date information, estimated damages and reference to buy-in procedures.

      Additionally, Section l(c) of the Uniform Practice Code (Exhibit C) is also being amended to provide language which provides that in cases of non-delivery of securities, the non-delivering party shall be liable damages, and that claims for such damage be made promptly.

      EFFECTIVE DATE OF THE AMENDMENTS

      The amendments described herein will be effective on January 1, 1985, so that liability notices issued on or after January 1, 1985 and buy-ins executed pursuant to those notices will be subject to the amended procedures.

      The text of the amendments to Sections l(c) and 59(j) of the Association's Uniform Practice Code is attached along with a sample liability notice. Questions regarding these changes may be directed to Donald Catapano, Uniform Practice, (212) 839-6255.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachments

      Exhibit A

      NEW SECTIONS 59(j) OF THE UNIFORM PRACTICE CODE:
      OLD SECTION 59(j) DELETED

      Failure to Deliver and Liability Notice Procedures

      (j)
      (l) If a Contract is for warrants, rights, convertible securities or other securities which have been called for redemption or are due to expire or on which a call or expiration date is impending or is for securities which are subject to a tender or exchange offer or other such event and the last day on which the securities must be delivered or surrendered (the "expiration date") is the settlement date of the contract or any day after the settlement date, in addition to the close-out procedures set forth in paragraphs (a)–(h) of this Section, the receiving member may deliver a Liability Notice to the delivering member. Such Notice must be issued no later than one business day prior to the latest time and date of the offer or other event in order to obtain the protection provided by this rule.
      (2) If the delivering Member fails to deliver the securities on the expiration date, the delivering Member shall be liable for any damages which may accrue thereby. The Liability Notice delivered in accordance with the provisions of this rule shall serve as notification by the receiving Member of the existence of a claim for damages. All claims for such damages shall be made promptly.
      (3) For the purposes of this Section, the term "expiration date" shall be defined as the latest time and date on which securities must be delivered or surrendered, up to and including the last day of the protect period, if any.
      (4) If the above procedures are not utilized as provided under this rule, contracts may be "bought-in" without prior notice, after normal delivery hours established in the community where the buyer maintains his office, on the expiration date. Such buy-in execution shall be for the account and risk of the defaulting member.

      Exhibit B

      SAMPLE FORM

      SAMPLE LIABILITY NOTICE - ON MEMBER'S LETTERHEAD

      PDF TO BE INCLUDED

      Exhibit C

      (New Language Underscored)

      SCOPE OF UNIFORM PRACTICE CODE

      Section 1

      (a) (no changes)
      (b) (no changes)
      (c) In trades between members, failure to deliver the securities sold, or failure to pay for securities as delivered, on or after the settlement date, does not effect a cancellation of the contract. The remedy for the buyer or seller is provided for by Sections 59 and 60, respectively, unless the parties mutually consent to cancel the trade. In every such case of non-delivery of securities, the party in default shall be liable for any damages which may accrue thereby. All claims for such damages shall be made promptly.

    • 84-67 NASDAQ National Market System Grows to 1,185 Securities With 50 Voluntary Additions on December 18, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, December 18, 1984, 50 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,185. These issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 50 issues scheduled to join NASDAQ/NMS on Tuesday, December 18, 1984, are:

      Symbol

      Company Name

      Location

      AMAB

      Alaska Mutual Bancorporation

      Anchorage, AK

      ATPC

      Athey Products Corporation

      Raleigh, NC

      BBCM

      Baltimore Bancorp

      Baltimore, MD

      BELF

      Bel Fuse Inc.

      Jersey City, NJ

      BUFF

      Buffton Corporation

      Fort Worth, TX

      BKLY

      W. R. Berkley Corporation

      Greenwich, CT

      CBTB

      CB&T Bancshares, Inc.

      Columbus, GA

      CFSD

      Capitol Federal Savings and Loan Association of Denver

      Aurora, CO

      VETS

      Cardio Pet, Inc.

      Brooklyn, NY

      CHCR

      Chancellor Corporation

      Boston, MA

      CTEC

      Component Technology Corp.

      Erie, PA

      CNFG

      The Connifer/Essex Group, Inc.

      Worcester, MA

      DLCH

      Delchamps, Inc.

      Mobile, AL

      EDMC

      ElDorado Motor Corporation

      Minneapolis, KS

      ENGH

      Engraph, Inc.

      Atlanta, GA

      EPUB

      Entertainment Publications, Inc.

      Birmingham, MI

      FBOH

      First Bancorporation of Ohio

      Akron, OH

      FFOM

      First Federal of Michigan

      Detroit, MI

      GANDF

      Gandalf Technologies Inc.

      Ontario, Canada

      GNVA

      Genova, Inc.

      Davison, MI

      GCRA

      Golden Corral Realty Corporation

      Raleigh, NC

      HCWO

      HCW Inc.

      Boston, MA

      HLMI

      Robert Halmi, Inc.

      New York, NY

      HCSG

      Healthcare Services Group, Inc.

      Huntingdon Valley, PA

      INFR

      Infrared Industries, Inc.

      Sanford, FL

      IVCR

      Invacare Corporation

      Elyria, OH

      ITELP

      Itel Corporation (Preferred)

      San Francisco, CA

      JJSC

      Jefferson Smurfit Corporation

      Alton, IL

      KBALB

      Kimball International, Inc.

      Jasper, IN

      KNCD

      Kincaid Furniture Company, Incorporated

      Hudson, NC

      LOCL

      Local Federal Savings and Loan Association

      Oklahoma City, OK

      MCFV

      McFaddin Ventures, Inc.

      Houston, TX

      MSTI

      Medical Sterilization, Inc.

      Syosset, NY

      MRDNP

      Meridian Bancorp, Inc. (Preferred)

      Reading, PA

      MAIR

      Metro Airlines, Inc.

      Houston, TX

      MSHR

      Miseher Corporation (The)

      Houston, TX

      HMOA*

      National Comprehensive Services, Inc.

      Chicago, IL

      OHBC

      Ohio Bancorp

      Youngstown, OH

      PASN

      Parisian, Inc.

      Birmingham, AL

      RSTO

      Rose's Stores, Inc.

      Henderson, NC

      RSTOB

      Rose's Stores, Inc. Class B

      Henderson, NC

      SCIT

      Scientific, Inc.

      Scotch Plains, NJ

      SREG

      Standard Register Company (The)

      Dayton, OH

      SRFI

      Super Rite Foods, Inc.

      Shiremanstown, PA

      COMS

      3Com Corporation

      Mountain View, CA

      THOR

      Thor Industries, Inc.

      Jackson Center, OH

      TBCM

      Triboro Communications, Inc

      New York, NY

      TYSN

      Tyson Foods, Inc.

      Springdale, AR

      VOLVY

      Volvo, A. B.

      Goteborg, Sweden

      WONE

      Westwood One, Inc.

      Culver City, CA

      * * *

      The following changes to the list of NASDAQ/NMS securities occurred since November 7, 1984.

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      BOHI

      Bancohio Corporation

      11/09/84

      KARE

      Care Enterprises

      11/30/84

      CFSC

      Continental, Inc.

      11/21/84

      DDII

      Digital Datacom, Inc.

      11/21/84

      HCRX

      Health Care & Retirement Corp. of America

      12/03/84

      ITSIW

      International Totalizator Systems Warrants

      11/09/84

      MWCH

      Monchik-Weber Corporation

      11/09/84

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at(202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President


      * National Comprehensive Services, Inc. will be changed to HMO America, Inc. as of December 19, 1984.


    • 84-66 Vantage Securities of Colorado, Inc. 7000 E. Belleview Avenue, #307 Englewood, Colorado

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On November 30, 1984, the United States District Court for the District of Colorado appointed a SIPC Trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Glen E. Keller, Jr., Esquire
      Davis, Graham & Stubbs
      2600 Colorado National Building
      950 Seventeenth Street
      P.O. Box 185
      Denver, Colorado 80201
      Telephone: (303) 892-9400

    • 84-65 Christmas Day–New Year's Day: Trade Date—Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Tuesday, December 25, 1984, Christmas Day, and Tuesday, January 1, 1985, New Year's Day. "Regular Way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      December 17

      December 24

      December 27

      18

      26

      28

      19

      27

      31

      20

      28

      January 2 1985

      21

      31

      3

      24

      January 2 1985

      4

      25

      Markets Closed

      26

      January 3 1985

      7

      27

      4

      8

      28

      7

      9

      31

      8

      10

      The foregoing settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.

      * * * *


      * Pursuant to Section 4(e)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."

    • 84-64 Securities and Exchange Commission Interpretation of Application of Rule 15c2-4 to Direct Participation Program Offerings

      TO: All NASD Members and Other Interested Persons

      Attention: Direct Participation Programs Department

      The NASD is publishing a letter issued by the Securities and Exchange Commission, providing interpretive advice with respect to the application of Rules 15c2-4 and 15c3-l to public and private offerings of direct participation programs. Rule 15c2-4 applies to offerings of securities being made on an "all-or-none" basis or on another basis pursuant to which payment will not be made to the issuer until a particular contingency occurs (best efforts distributions). Pending occurrence of the contingency, Rule 15c2-4 requires each participating broker-dealer either to (1) promptly deposit investors' funds into a separate bank account, if the broker-dealer is required to maintain minimum net capital of $25,000 and is not affiliated with the issuer or general partner 1/ or (2) promptly transmit such funds to a bank escrow agent, if the broker-dealer is required to maintain minimum net capital of $5,000 or is a $25,000. broker-dealer affiliated with the issuer or general partner.

      The interpretive advice of the Commission staff relates to the term "promptly transmitted** in Rule 15c2-4. In Notice to Members 84-7, dated January 30, 1984, the Commission staff interpreted the term "promptly transmitted" to mean:

      Absent unusual circumstances, funds should be.. .transmitted as soon as practicable after receipt. In contingent offerings not requiring suitability determinations by the issuer or the general partner, funds should be ... transmitted by noon the next business day. In contingent offerings requiring suitability determinations by the issuer or general partner (for example, most direct participation programs) where investors' checks are made payable solely to the bank escrow agent but delivered to the broker-dealer, prompt transmittal may be accomplished by forwarding the checks to the escrow agent by noon of the next business day or by noon of the second business day after receipt of the subscription by the issuer or general partner. If the latter option is used, the subscription must be forwarded to the issuer or general partner by noon of the next business day after receipt of the funds.

      In discussions between the NASD and the Task Force of the American Bar Association Federal Regulation of Securities Committee, Subcommittee on Partnerships, Trusts and Unincorporated Associations with the Commission staff, it was represented that the above interpretation in the context of direct participation program offerings, prevented some broker-dealers from adequately performing the complex suitability determinations required in such offerings and that it also required the premature separation of investor checks from subscription documents resulting in processing errors, risk of loss as well as causing loss of control of the offering.

      As a result of these discussions and a request for interpretive advice, the Commission staff has indicated that compliance with certain new procedures would satisfy the "promptly transmitted" requirement of Rule 15c2-4 for direct participation programs. Following is an excerpt of the Commission staff interpretive letter containing those new procedures.

      I. Format of Checks/Escrow Agent
      Investors will be instructed to make their checks payable to a bank escrow agent ("Escrow Agent"), as agent for the issuer. Any soliciting broker-dealer receiving a check not conforming to the foregoing instructions shall return such check directly to such subscriber not later than the end of the next business day following its receipt. Checks received by soliciting broker-dealers which conform to the foregoing instructions shall be transmitted for deposit by any soliciting dealer pursuant to one of the methods described below under "Transmittal Procedures."
      II. Transmittal Procedures
      Transmittal of received investor funds will be made in accordance with the following procedures:
      (a) Off-Site Supervisory Review
      Where, pursuant to a soliciting broker-dealer's internal supervisory procedures, internal supervisory review is conducted at the same location at which subscription documents and checks are received from subscribers, checks will be transmitted by the end of the next business day following receipt by the soliciting broker-dealer for deposit to the Escrow Agent or to the broker-dealer registered under the Exchange Act (the "Processing Broker-Dealer") whose responsibilities in the offering include handling, reviewing investor suitability, processing and documentation of subscriptions and investor funds received.
      (b) On-Site Supervisory Review
      Where, pursuant to a soliciting broker-dealer's internal supervisory procedures, final internal supervisory review is conducted at a different location, checks will be transmitted by the end of the next business day following receipt by the soliciting broker-dealer to the office of the soliciting broker-dealer conducting such final internal supervisory review (the "Final Review Office"). The Final Review Office will in turn, by the end of the next business day following receipt of the Final Review Office, transmit such checks for deposit to the Escrow Agent or to the Processing Broker-Dealer.
      (c) Processing Broker-Dealer
      Where a Processing Broker-Dealer is involved in the distribution process, checks will be transmitted by such Processing Broker-Dealer for deposit to the Escrow Agent as soon as practicable, but in any event by the end of the second business day following receipt by the Processing Broker-Dealer. Checks of rejected subscribers will be promptly returned to such subscribers.

      A reprint of the Commission staff interpretive letter is attached.

      Any questions regarding this Notice should be addressed to Harry E. Tutwiler, Associate Director, or Suzanne E. Rothwell, Assistant Director, Corporate Financing Department, at (202) 728-8258 or William Schief, Director of Regional Attorneys, Surveillance Department, at (202) 728-8229.

      Sincerely,

      Frank J.Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      DIVISION OF MARKET REGULATION

      UNITED STATES

      SECURITIES AND EXCHANGE COMMISSION

      WASHINGTON. D.C. 20549

      October 16, 1984

      Linda A. Wertheimer, Chairman
      Subcommittee on Partnerships, Trusts and Unincorporated Associations
      Federal Regulation of Securities Committee
      American Bar Association
      4300 InterFirst One
      Dallas, Texas 75202

      Re: Task Force of the American Bar Association Federal Regulation of Securities Committee, Subcommittee on Partnerships, Trusts and Unincorporated Associations: Compliance with Rule 15c2-4 in the context of direct participation program offerings File No. TP 85-3

      Dear Ms. Wertheimer:

      In your letter dated October 8, 1984, as supplemented by telephone conversations with the staff, you request on behalf of the Task Force of the American Bar Association Federal Regulation of Securities Committee, Subcommittee on Partnerships, Trusts and Unincorporated Associations (the "Task Force") interpretive advice under Rules 15c2-4 and 15c3-l under the Securities Exchange Act of 1934 ("Exchange Act") with respect to the treatment of subscription documentation and checks received by certain broker-dealers in the context of direct participation program offerings, as more fully described below.

      Background

      Rule 15c2-4 under the Exchange Act, 17 CFR 240.15c2-4, provides, in pertinent part:

      It shall constitute a "fraudulent, deceptive or manipulative act or practice" as used in Section 15(c)(2) of the Act, for any broker, dealer or municipal securities dealer participating in any distribution of securities, other than a firm-commitment underwriting, to accept any part of the sale price of any security being distributed unless:
      •••
      (b) If the distribution is being made on an "all-or-none" basis, or on any other basis which contemplates that payment is not to be made to the person on whose behalf the distribution is being made until some further event or contingency occurs, ... (2) all [money or other consideration received from investors is] promptly transmitted to a bank which has agreed in writing to hold all such funds in escrow for the persons who have the beneficial interests therein and to transmit or return such funds directly to the persons entitled thereto when the appropriate event or contingency has occurred. [Emphasis supplied.]

      Rule 15c3-l(a)(2) under the Exchange Act, 17 CFR 240.15c3-l (a)(2), permits a broker-dealer to maintain net capital of not less than $5,000 if he does not hold funds or securities for, or owe money or securities to, customers and does not carry accounts of, or for, customers (with limited exceptions not pertinent here), and limits his business to one or more specified securities activities, including satisfaction of the following condition:

      (ii) He participates, as broker or dealer, in underwritings on a "best efforts" basis or "all or none" basis in accordance with the provisions of 17 CFR 240.15c2-4(b)(2) and he promptly forwards to an independent escrow agent customers' checks, drafts, notes or other evidences of indebtedness received in connection therewith which shall be made payable to such escrow agent;... [Emphasis supplied.]

      In Notice to Members 84-7 (January 30, 1984) ("Notice 84-7") issued by the National Association of Securities Dealers, Inc. ("NASD"), the Commission's staff addressed, inter alia, the interpretation of the term "promptly transmitted" in the context of Rule 15c2-4.

      Absent unusual circumstances, funds should be ... transmitted as soon as practicable after receipt. In contingent offerings not requiring suitability determinations by the issuer or the general partner, funds should be ... transmitted by noon of the next business day. In contingent offerings requiring suitability determinations by the issuer or general partner (for example, most direct participation programs) where investors checks are made payable solely to the bank escrow agent but delivered to the broker-dealer, prompt transmittal may be accomplished by forwarding the checks to the escrow agent either by noon of the next business day or by noon of the second business day after receipt of the subscription by the issuer or general partner. If the latter option is used, the subscription must be forwarded to the issuer or general partner by noon of the next business day after receipt of the funds. See SEC Interpretive Letter issued to Lowell H. Listrom & Company, Inc. (April 27, 1983).

      You make the following representations:

      The Task Force includes members who represent or are affiliated with entities which conduct offerings of direct participation programs, as such term is defined in Section 34(d) (2) of the NASD's Rules of Fair Practice. These offerings either are registered with the Commission or are conducted in reliance upon the availability of exemptions from registration under Sections 3(a)(11), 3(b) and 4(2) of the Securities Act of 1933, as amended (such offerings being collectively referred to herein as "DPP Offerings").

      With respect to such DPP Offerings, the Task Force is concerned that compliance with the interpretation of "promptly transmitted" in Rule 15c2-4(b)(2) as expressed in Notice 84-7 would prevent some broker-dealers from adequately performing the complex suitability determinations required in such offerings and would require premature separation of investor checks from subscription documentation, thereby increasing processing errors and risk of loss, as well as causing loss of control by broker-dealers of the mechanics of the offering for which they are responsible. This may occur because the present interpretation of "promptly transmitted" does riot take into account the number of steps frequently involved in DPP Offerings where one broker-dealer receives the investor's documentation which must then be reviewed at one or two additional locations before the suitability determination is concluded. This process requires more time than the current staff interpretation permits. Moreover, the requirement that the initial broker-dealer in such circumstances retain custody of the investor's check until it is transmitted to the escrow account results in separation of the subscription agreement and the check and has contributed to delays and errors in the overall process.

      Task Force proposal for procedures which will satisfy the "promptly transmitted" requirement of Rule 15c2-4(b)(2)

      In order to alleviate these problems, the Task Force proposes that the staff interpret "promptly transmitted" in Rule 15c2-4(b)(2) to permit the following procedures to be used in DPP Offerings.

      I. Format of Checks/Escrow Agent
      Investors will be instructed to make their checks payable to a bank escrow agent ("Escrow Agent"), as agent for the issuer. Any soliciting broker-dealer receiving a check not conforming to the foregoing instructions shall return such check directly to such subscriber not later than the end of the next business day following its receipt. Checks received by soliciting broker-dealers which conform to the foregoing instructions shall be transmitted for deposit by any soliciting dealer pursuant to one of the methods described below under "Transmittal Procedures."
      II. Transmittal Procedures
      Transmittal of received investor funds will be made in accordance with the following procedures:
      (a) On-Site Supervisory Review
      Where, pursuant to a soliciting broker-dealer's internal supervisory procedures, internal supervisory review, is conducted at the same location at which subscription documents and checks are received from subscribers, checks will be transmitted by the end of the next business day following receipt by the soliciting broker-dealer for deposit to the Escrow Agent or to the broker-dealer registered under the Exchange Act (the "Processing Broker-Dealer") whose responsibilities in the offering include handling, reviewing investor suitability, processing and documentation of subscriptions and investor funds received.
      (b) Off-Site Supervisory Review
      Where, pursuant to a soliciting broker-dealer's internal supervisory procedures, final internal supervisory review is conducted at a different location, checks will be transmitted by the end of the next business day following receipt by the soliciting broker-dealer to the office of the soliciting broker-dealer conducting such final internal supervisory review .(the "Final Review Office"). The Final Review Office will in turn, by the end of the next business day following receipt by the Final Review Office, transmit such checks for deposit to the Escrow Agent or to the Processing Broker-Dealer.
      (c) Processing Broker-Dealer
      Where a Processing Broker-Dealer is involved in the distribution process/checks will be transmitted by such Processing Broker-Dealer for deposit to the Escrow Agent as soon as practicable, but in any event by the end of the second business day following receipt by the Processing Broker-Dealer. Checks of rejected subscribers will be promptly returned to such subscribers.

      In conjunction with all of the foregoing procedures, investor checks and subscription documentation delivered on " Saturdays, Sundays and holidays will be treated as not having been received by a broker-dealer until the first business day thereafter.

      Staff Response:

      On the basis of your representations and the facts presented, noting particularly the condition that investor checks which are not properly made out to the bank escrow agent will be returned to the investor by the end of the next business day following receipt by the soliciting broker-dealer, this Division has concluded that transmission of checks under the circumstances described above is not likely to result in any of the abuses that Rules 15c2-4 and 15c3-l were designed to prevent. Accordingly, this Division takes the position that such procedures, if otherwise employed in compliance with Rule 15c2-4, would satisfy the "promptly transmitted" requirement of Rule 15c2-4(b)(2). The Division also takes the position that these procedures, if otherwise employed in compliance with Rule 15c3-l, would constitute participation in a "best efforts" or "all or none" offering in accordance with the provisions of Rule 15c2-4(b)(2) within the meaning of paragraph (a)(2)(ii) of Rule 15c3-l. Nothing herein, however, shall limit the ability of a broker-dealer complying with Rule 15c3-l(a)(1) ("$25,000 broker-dealer") not affiliated with the issuer or the general partner to avail itself of the procedures afforded by Rule 15c2-4(b)(1). The foregoing interpretive advice is based solely on your representations and the facts you have presented to the staff, and is strictly limited to the .application'-of Rules 15c2-4 and 15c3-l to the procedures described above.


      1/ SEC staff has previously provided advice that ". . . where an issuer and a broker-dealer are affiliated, the broker-dealer should not act as agent or trustee for the funds." See NASD Notice to Members 84-7 (January 30, 1984), Question 7.


    • 84-63 Small Order Execution System (SOES)

      TO: NASD Members and NASDAQ Level 2 and Level 3 Subscribers

      Listed below are the 25 NASDAQ National Market System (NASDAQ/NMS) securities which have been selected as the first group of issues to trade in the Small Order Execution System (SOES) developed and operated by NASD Market Services, Inc. In SOES, agency orders of 500 shares or less received from public customers may be executed automatically with SOES market makers at the "inside" or best price in the NASDAQ System at the time of execution.

      The initial group of SOES stocks was chosen based on an analysis of cleared trade data compiled during a two week period in September 1984. The 25 most active securities, measured in terms of the number of reported trades of 500 shares or less, were selected. After the start-up of SOES in December 1984, the universe of SOES stocks will be expanded to include all MASDAQ/NMS, and eventually all NASDAQ securities.

      For more information on SOES, including the procedures which must be followed to register as a SOES market maker or order entry firm, please contact Robert Soos, Supervisor, SOES Operations Center, at (212) 839-6210.

      SOES SECURITIES

      NASDAQ Symbol

      Company Name

      AAPL

      Apple Computer, Inc.

      MCIC

      MCI Communications Corp.

      INTC

      Intel Corporation

      SGAT

      Seagate Technology

      MYLN

      Mylan Laboratories, Inc.

      CVGT

      Convergent Technologies

      DRAM

      Micron Technology, Inc.

      TCOR

      Tandon Corporation

      TNDM

      Tandem Computers, Inc.

      LOTS

      Lotus Development Corp.

      DIGI

      Digital Switch Corp.

      INGR

      Intergraph Corporation

      CHIC

      Chi Chi's Inc.

      USHC

      United States Health Care Systems, Inc.

      GSCC

      Graphic Scanning Corp.

      AVAK

      Avantek, Inc.

      MMIC

      Monolithic Memories, Inc

      EMLX

      Emulex Corporation

      SFIN

      Southland Financial Corp.

      PEXP

      People Express Airlines

      SMSC

      Standard Microsystems Corporation

      DNIC

      Diasonics, Inc.

      IOMG

      Iomega Corporation

      APCI

      Apollo Computer Inc.

      TELV

      Tele video Systems, Inc.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

    • 84-62 Effect of the Tax Reform Act of 1984 and Amendments to Various NASD and SEC Rules on NASD Qualification Examinations

      TO: All NASD Members and Interested Persons

      ATTN: Registration, Training and Compliance Personnel

      The subject matter of various NASD qualification examinations has been affected by the passage of the Tax Reform Act of 1984 (the "Act") as well as by recently adopted amendments to certain SEC and NASD rules. The test items affected by these changes have been deleted from the current test question banks. Updated questions will be instated in the appropriate examinations effective January 1, 1985. In addition, new recordkeeping and IRS reporting requirements for broker-dealers and promoters of tax sheltered investments were adopted under the Act. Because of their relevance to the securities industry, test questions on these rules will also be incorporated in the appropriate examination banks on January 1, 1985. The following is a brief explanation of the new compliance requirements under the Tax Reform Act of 1984.

      • Promoter's Investor List - The Act requires organizers and sellers of "tax shelter" investments sold after August 31, 1984, to maintain investor lists and provide them to the IRS on request. The list must be maintained for seven years for any tax shelter program required to be registered.
      • Promoter's Penalty - Effective July 18, 1984, the Act provides for a penalty on promoters of abusive tax shelters equal to the greater of $1,000 or 20% of shelter income to be derived from the organization or sale of the program.
      • Registration of Tax Shelters - The Act requires tax shelter promoters to register their tax shelter programs sold after August 31, 1984, with the IRS or before the day it is first offered for sale. The IRS will assign a registration number to each program and the promoters will have to notify the investors of this number so that it can be included on their tax returns.
      • Disposition of Partnership Interests - Beginning in 1985, when partnership interests are exchanged or sold, the Act requires a partnership after it is notified by the selling partner, to inform the IRS, the seller and the buyer of the fair market value of the partner's allocable share of unrealized receivables and appreciated inventory. This provision applies to all partnerships.
      • Original Issue Discount Reporting - The Act provides that issuers of publicly traded original issue discount instruments issued after July 18, 1984, must furnish information to the IRS including issue date and the amount of original issue discount.

      * * * * *

      On April 3, 1984, the NASD adopted a new rule under Article III, Section 38, of the Rules of Fair Practice. As approved by the SEC, Section 38 addresses two levels of possible financial or operational difficulties of member firms. First, it restricts a member from expanding its business whenever certain early warning criteria relating to minimum capital, ratios or scheduled capital withdrawals are exceeded. Secondly, it covers a deteriorating situation in which another set of warning criteria with lower tolerance are exceeded. In such situations, the rule requires a member to reduce or eliminate certain facets of its business. The rule is intended to address such problems in a timely fashion to protect the member, the investing public and other members. For more information on this new rule, refer to NASD Notice to Members 84-21, dated April 3, 1984.

      * * * * *

      Recently adopted amendments to certain SEC and NASD rules which will be reflected in the qualification examinations on January 1, 1985, include the following:

      A. Rule 144 Under the Securities Act of 1933 - Paragraph (k) under Rule 144: Termination of certain restrictions on sales of restricted securities by persons other than affiliates.
      B. NASD Rules of Fair Practice
      Section 1 - Amendments to the Free-Riding and Withholding Interpretation: The purpose of this amendment is to explain in more detail provisions already in the Interpretation. Refer to NASD Notice to Members 83-68, dated December 12, 1983, for further details.
      Section 10 - Influencing or rewarding employees of others: The limit on gifts and gratuities to any person, principal, proprietor, employee, agent or representative is $50 per year.
      Section 34 - Direct Participation Programs: The provisions of Appendix F have been amended to require disclosure to public investors of the use of sales incentive programs. The amendments are also designed to permit members participating in public offerings of programs utilizing such arrangements to appropriately supervise their salesmen and maintain required books and records. The amendments also require that all sales incentives be paid to a member and that such incentives be paid only in the form of cash. Refer to NASD Notice to Members 84-28, dated May 22, 1984, for further details.
      C. Article V—Penalties
      Section 1 - Penalties for violations of the rules: This amendment increases from $5,000 to $15,000 the maximum fine which may be assessed upon any member or person associated with a member.
      D. Code of Procedure for Handling Complaints
      Section 12 - Summary Complaint Procedure: This amendment increases from $1,000 to $2,500 the penalty which may be imposed by summary complaint procedure for all violations of the Rules of Fair Practice as to each respondent.
      E Code of Arbitration Procedure
      Amendments to various sections of the Code are intended to conform the provisions of the Association's Code of Arbitration Procedure to recent amendments to the Uniform Arbitration Code which has been developed by the Securities Industry Conference on Arbitration. The Uniform Code, as implemented by the various self-regulatory organizations, has established throughout the securities industry a uniform system of arbitration procedures. Refer to NASD Notice to Members 84-51, dated September 28, 1984, for further details.

      * * * * *

      The remainder of this notice summarizes changes in the Tax Reform Act of 1984 which affect various qualification examinations. This is followed by a chart identifying the specific examinations and relevant study outline sections affected by all the material of this notice.

      All questions in the item banks affected by these changes will be updated to reflect the new rule provisions beginning January 1, 1985.

      Questions regarding this notice should be directed to Carole Hartzog at (202)728-8141.

      Sincerely,

      Frank J. McAuliffe
      Vice President
      Qualifications Department

      Attachments

      Tax Reform Act of 1984

      A. Individual Income Taxes
      Capital gain holding period - The Act reduces to six months the long-term capital gain or loss holding period for assets acquired after June 22, 1984. This one year holding period will be reinstated for assets acquired after 1987.
      Alternative minimum tax - For tax years beginning after 1982, the Act clarifies that:
      • When calculating the regular tax for alternative minimum tax purposes, the amount of any recaptured investment credit due is in addition to the alternative minimum tax and regular tax liability. The credit must be recaptured and added to the amount of tax for the year of disposition.
      • Intangible drilling costs are tax preference items for purposes of the alternative minimum tax, unless they are capitalized (in which case they are eligible for the investment credit and ACRS deductions). The new law makes clear that the election to the ACRS deductions and the investment credit in lieu of expensing intangible drilling costs is only available for oil, gas and geothermal wells located in the U.S.
      • Rapid writeoffs of circulation expenses are a tax preference item to the extent they exceed the amount allowable had the expenditures been capitalized and deducted ratably over a 10-year period. The new law substitutes a 3-year amortization period for the 10-year period.

      Investment income from S corporations - Effective for tax years beginning 1982, income from an S corporation will be treated as investment income if the individual so elects. However, income attributable to personal services is not eligible for treatment as investment income.
      B. Tax-Oriented Investment Transactions
      Prepayment of expenses - For prepayments made after March 31, 1984, the Act provides that "tax shelters" (other than farming syndicates), whether on the cash or accrual method will not be permitted to deduct prepaid expenses until both economic performance occurs and the expense is actually paid or incurred. Economic performance will generally occur when services are performed, property is provided, use of property occurs or when the obligation to perform is otherwise satisfied. These provisions will apply to individuals engaged in farming activities with the principal purpose of tax avoidance.
      C. Business Income Taxes—Real Estate
      Real property recovery period - Effective for property placed in service after March 15, 1984, the recovery period of real property (other than low-income housing) is lengthened to 18 years based on 175% declining balance, or straight line over a period of 18, 35 or 45 years. The 15 year recovery period at accelerated rates based on 200% declining balance for low income housing remains unchanged.
      Rehabilitation Credit - For rehabilitation expenditures incurred after 1983, the Act provides an alternative test to determine whether a project qualifies for the rehabilitation credit and allows the credit where:
      • at least 50% of the external walls are retained as external walls.
      • at least 75% of the external walls are retained as either external or internal walls.
      • at least 75% of the internal structural framework is retained in place.

      Rehabilitation of low-income housing - The Act extends retroactively for three years the prior law provisions permitting the amortization over 60 months of certain rehabilitation expenditures on low-income housing.
      D. Business Income Taxes — General
      Investment tax credit for used property — The scheduled increase in the amount of used property eligible for the investment tax credit from $125,000 to $150,000 has been deferred to 1988.
      Depreciation recapture on installment sales - All depreciation recapture on installment sales of both real and personal property occurring after June 6, 1984, is recognized as income in the year of sale. The remaining gain on the sale will continue to be reported proportionately as the installments are received.
      Non-simultaneous, like-kind exchanges - Property received in an exchange after July 18, 1984, will not qualify for like-kind, non-recognition treatment unless it is received within 180 days of the taxpayer's transfer. The substitute like-kind property must be identified within 45 days.
      At-risk rules - For property placed in service after July 18, 1984, the Act reduces the base for the investment tax credit by the amount of nonrecourse indebtedness. However, non-recourse financing that is qualified commercial financing will not reduce the credit base. Qualified commercial financing includes any financing, other than convertible debt for property that:
      • does not exceed 80% of the credit base of the property;
      • is borrowed generally from an unrelated person regularly engaged in the business of lending money;
      • is not acquired from a related party.

      Start-up expenses - For tax years beginning after June 30, 1984, the Act makes clear that certain start-up expenses incurred in maintaining property (prior to its use in any active trade or business) are not current deductions but must be capitalized with an election to amortize over not less than 60 months. The Act provides that, when a trade or business is disposed of completely before the end of the amortization period, the unamortized start-up expenses may be deducted in that year.
      Sound recordings - Sound recordings placed in service after March 15, 1984, may be treated as three-year ACRS property and be eligible for a 6% investment tax credit or they may be depreciated under the income forecast method without ITC.
      Movies and video tapes - Movies and video tapes placed in service after 1980 do not qualify for ACRS or the 10% investment credit.
      Basis adjustment for investment credit - TEFRA required taxpayers to reduce the basis of property by 50% of the allowed investment credit. On dispositions that trigger recapture of the credit, basis is increased immediately before the disposition by 50% of the recaptured credit. Under the new law, partners and S corporation shareholders must adjust their basis in the partnership interest or S corporation stock to reflect the basis adjustment by the partnership or S corporation on the allowance or recapture of the investment credit.
      Construction period interest and taxes - The 1982 tax act provided that corporations must capitalize construction period interest and taxes with respect to nonresidential real property. The Act clarifies that commencing after 1982, construction period interest and taxes with respect to dwelling units in a cooperative housing corporation are exempt from the capitalization requirements, since that property is residential property.
      E. Partnership
      Property contributed to a partnership - Under the Act, where property is contributed to a partnership after March 31, 1984:
      • Built-in losses on capital assets contributed to a partnership will retain their character as capital losses for five years.
      • Contributed inventory will retain its character as ordinary income property for five years of ownership by the partnership.
      • Depreciation, depletion and any built-in gain or loss from a sale of partnership property will generally have to be allocated to the contributing partner.

      The Act also provides that, when a partner transfers money or other property to a partnership with a related direct or indirect transfer of money or other property to that partner or another partner, the transaction will be treated, where appropriate, as a sale of property between the partners, or as a partial sale and partial contribution of the property to the partnership. The selling partner will be required to recognize gain or loss on the amount of the deemed sales proceeds.
      Retroactive allocations - For amounts attributable to periods before or after March 31, 1984, the Act prohibits allocations of items of income, gain, loss, deduction, or credit to partners entering the partnership either directly or through tiered arrangements, after the accrual of such items of taxable income or loss by cash basis partnerships. This provision is intended to prevent the practice of accrual of expenses by a cash basis partnership before the limited partners enter into the partnership, with those expenses later allocated to the limited partners and will significantly reduce the first year tax benefits allocable to limited partners entering a syndicated partnership.
      Other partnership allocations - For transfers after February 29, 1984, the Act provides that persons who become partners after performing services for, or transferring property to the partnership, are to be treated retroactively as partners.
      Treatment of certain partnership liabilities - Effective July 18, 1984, the Act gives the Treasury authority to issue regulations regarding the conditions under which recourse and non-recourse liabilities may be reflected in the basis of general and limited partners' interests. It is intended that regulations to be issued will allow an increase in a limited partner's basis when the limited partner provides a guarantee of partnership debt or otherwise assumes economic risk.
      F. Securities Transactions
      Market discount bonds - Under the Act, for bonds issued after date of enactment and interest on bonds acquired after July 18, 1984, accrued market discount is taxed as interest income to the bondholder and recognized upon disposition of the bond (including disposition by gifts). Bondholders can elect to compute the accrued market discount under the economic accrual formula used for original issue discount rather than using the linear (straight-line) method. Also, an election is available to individuals who desire to report the accrued market discount on a current basis.
      The Act also defers deductions for net interest expense on debt incurred or continued to purchase or carry a market discount bond, including expenses relating to short sales used to generate funds.
      Options transactions - For positions established after December 31, 1983, the Act required that, where an investor has certain offsetting positions, and loss realized from closing one position must be deferred for tax purposes to the extent of any unrecognized gain on an offsetting position. This provision applies, for example, to:
      • "Covered option" positions involving "deep-in-the-money" options. (Covered option writing is an investment strategy whereby an owner of stock "writes" or sells short an option on the same stock. Under present law, an investor who sells deep-in-the-money options to offset a stock ownership position can continue to hold the stock with very limited market risk. This technique was also used to extend a holding period until it became long-term.)
      • Offsetting positions involving two traded options.
      • Offsetting positions in a stock and related securities (such as convertible debentures of the same corporation).
      • Positions in stock index products, including options offset by a stock portfolio that follows the performance of the index.

      Short sales - Under the Act, for short sales after July 18, 1984, payments made by short sellers of stock in lieu of dividends cannot be deducted against ordinary income unless the short sale is held open for at least 46 days. In the case of extraordinary dividends, the short sale must be held open for at least one year. Payments disallowed will be added to the basis of the stock used to close the short sale.
      Capital gain dividends of investment companies - Under present law, an individual may buy shares in a regulated investment company that is about to distribute a sizable long-term capital gain dividend, hold the shares for 31 days and then sell them probably at a short-term loss roughly equivalent to the value of the dividend. The result would be a long-term capital gain and a short-term capital loss in approximately equal amounts. Under the Act, if a shareholder of a regulated investment company or a real estate investment trust holds stock for less than six months, any loss recognized on the sale of such stock will be treated as a long-term capital loss to the extent of any distribution on the stock which was treated as long-term capital gain. An exception is provided for dispositions of stock pursuant to a periodic redemption plan. This provision is effective for losses incurred on shares acquired after July 18, 1984.
      Original issue discount on tax-exempt bonds - Original issue discount on any tax-exempt obligation will accrue under an economic accrual formula based on yield to maturity and compound interest. The effect of this provision will be to increase the adjusted basis of the bond only by this accrued discount in connection with the holder's determination of taxable gain or loss upon disposition of the bond. This provision is effective for obligations issued after September 3, 1982, and acquired after March 1, 1984.

      * * * * *

      EXAMINATIONS AFFECTED BY VARIOUS TAX LAW AND INDUSTRY RULE CHANGES

      (Numerical References Within Test Series Identify Study Outline Sections Affected By These Changes)

      Description

      Test Series Number

       

      4

      6

      7

      8

      22

      24

      26

      27

      39

      AMENDMENTS TO NASD/SEC RULES

                       

      Securities Act of 1933: Rule 144 — Persons deemed not to be engaged in a distribution and therefore not underwriters

                       

      Rule 144(k) — Termination of restrictions on sales of restricted securities

      2.5

      15.1

      1.1.1

      1.2

      NASD Rules

                       

      Article III — Rules of Fair Practice

                       

      Section 1 — Business conduct of members — Free-Riding and Withholding Interpretation of the Board

      4.6

      16.3

      1.1.3

      4.3.3

       

      1.4

      3.2

      Section 10 — Influencing or rewarding employees of others

      4.6

      16.3

      3.1

      4.3.3

      4.2

      3.2

      3.2

      Section 34 — Direct participation programs - Appendix F

      16.3

      1.1.3

      4.3.3

      1.4

      2.3

      Section 38 — Regulation of activities of members experiencing financial and/or operational difficulties

      X

      X

      X

      X

      Article V — Penalties

                       

      Section 1 — Penalties for violation of the rules

      4.6

      4.3.3

      4.2

      3.2

      3.2

      Code of Procedure

                       

      Section 12 — Summary Complaint Procedure

      4.6

      4.3.4

      4.2

      3.2

      3.2

      Code of Arbitration Procedure

      4.6

      16.6

      3.1

      4.3.5

      4.2

      3.2

      3.2

      TAX REFORM ACT OF 1984

                       

      Compliance

                       

      Promoter's customer list

      X

      X

      Promoter's penalty

      X

      X

      Registration of tax shelters

      X

      X

      Disposition of partnership interests

      X

      X

      Original issue discount reporting

      X

      X

      X

      Individual Income Taxes

                       

      Capital gain holding period

      1.6

      21.14

      14.3

      3.3

      1.4

      Alternative minimum tax changes

      3.3

      1.4

      Investment income from S corporations

      1.2

      1.2

      Tax-Oriented Investment Transactions

                       

      Prepayment of expenses

      3.2

      Business Income Taxes — Real Estate

                       

      ACRS write-off period

      4.2

      3.2

      Rehabilitation credit

      3.2

      Rehabilitation of low-income housing

      3.2

      Business Income Taxes — General

                       

      Investment credit — used property

      3.2

      Installment sales — depreciation recapture

      4.2

      3.3

      Like-kind exchanges

      3.3

      At-risk rules

      3.3

      1.4

      Start-up expenses

      2.1

      Sound recordings

      2.6

      Movies and video tapes

      2.6

      ITC basis adjustment

      3.2

      1.4

      Construction period interest and taxes

      3.2

      Partnership

                       

      Property contributed to a partnership

             

      3.3

           

      1.4

      Retroactive allocations

             

      3.3

           

      1.4

      Other partnership allocations

             

      3.3

           

      1.4

      Certain partnership liabilities

             

      3.3

           

      1.4

      Securities Transactions

                       

      Market discount bonds

      14.11

      Options transactions

      1.6

      14.10

      Short sales

      1.6

      14.9

      Capital gain dividends of investment companies

      2.1

      2.2

      Original issue discount on tax-exempt bonds

      14.11

      TEST SERIES KEY

      Series Number

      Examination Title

      4

      Registered Options Principal Examination

      6

      Investment Company Products/Variable Contracts Representative Examination

      7

      General Securities Representative Examination

      8

      General Securities Sales Supervisor Examination

      22

      Direct Participation Programs Representative Examination

      24

      General Securities Principal Examination

      26

      Investment Company Products/Variable Contracts Principal Examination

      27

      Financial and Operations Principal Examination

      39

      Direct Participation Programs Principal Examination

    • 84-61 PLATO Learning Centers to Close Thanksgiving Week, November 19–23, 1984

      TO: All NASD Members and Interested Persons

      ATTN: Registration, Training and Compliance Personnel

      During the above period, the NASD will install and test new software for its qualification examination delivery system in the PLATO network. In order to preclude the possibility of disruptions during candidate testing sessions as this new software is installed, all Control Data Learning Centers will be closed from November 19th through November 23rd. This week includes the seasonal holiday closing schedule and thus involves a minimum interruption to the flow of testing in the PLATO learning centers. In order to compensate for this interruption, the expiration dates of all candidate enrollments originally scheduled to expire between November 19th and December 14th have been extended through December 31, 1984.

      Change in Calculator Use Policy During All Testing Sessions

      Current NASD policy permits the use of calculators by candidates during both written and PLATO testing sessions. Recent technological advances have resulted in a number of small computing devices coming to market which have limited word processing capabilities and provide for semi-permanent storage of data. In a testing environment, these devices present the potential for compromising the security of the questions used in the qualification examination program. Effective immediately, therefore, the NASD is instituting a policy limiting the use of computing devices during testing sessions to those which are capable of executing mathematical functions only. Candidates will NOT be allowed to use computing devices which provide the capability of entering alphabetical data. The new policy will permit candidates to continue to use calculators which operate silently, utilize a self-contained power source, have no print devices and no alphabetical key pads.

      Questions regarding this notice should be directed to David H. Uthe at (202) 728-8138.

      Sincerely,

      Frank J. McAuliff
      Vice President
      Qualifications Department

    • 84-60 1985 Schedule of Holidays

      TO: All NASD Members and Interested Persons

      Listed below is the NASD's 1985 schedule of holidays.

      January 1 (Tuesday)

      New Year's Day Observed

      February 18 (Monday)

      Washington's Birthday Observed

      April 5 (Friday)

      Good Friday

      May 27 (Monday)

      Memorial Day Observed

      July 4 (Thursday)

      Independence Day

      September 2 (Monday)

      Labor Day

      November 28 (Thursday)

      Thanksgiving Day

      December 25 (Wednesday)

      Christmas Day

      Sincerely,

      Gordon S. Macklin
      President

    • 84-59 National Market System Grows to 1,142 Securities With 40 Voluntary Additions on November 20, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, November 20, 1984, 40 issues are scheduled to join the NASDAQ National Market System bringing the total number of issues in NASDAQ/NMS to 1,142. These 40 issues, which will begin trading under real-time trade reporting, are entering the NASDAQ/NMS pursuant to the Securities and Exchange Commission's criteria for voluntary designation.

      The 40 issues scheduled to join NASDAQ/NMS on Tuesday, November 20, 1984 are:

      Symbol

      Company Name

      Location

      AQTN

      Aequitron Medical, Inc.

      Minneapolis, MN

      ATEE

      ATE Enterprises, Inc.

      Cincinnati, OH

      BGBR

      Big Bear, Inc.

      Columbus, OH

      BTRL

      Biotech Research Laboratories, Inc.

      Rockville, MD

      BOAT

      Boatmen's Bancshares, Inc.

      St. Louis, MO

      CRCH

      Church & Dwight Co., Inc.

      Piscataway, NJ

      CTRIS

      CleveTrust Realty Investors

      Cleveland, OH

      CRFT

      ComputerCraft, Inc.

      Houston, TX

      CBRP

      Continental Bancorp, Inc.

      Philadelphia, PA

      CTHL

      Continental Health Affiliates, Inc.

      Englewood Cliffs, NJ

      DEPC

      DEP Corporation

      Raneho Dominguez, CA

      FFHC

      First Financial Corporation

      Stevens Point, WI

      FJAK

      Flakey Jake's, Inc.

      Kirkland, WA

      FLOW

      Flow Systems, Inc.

      Kent, WA

      FSTRA

      L. B. Foster Company, Class A

      Pittsburgh, PA

      GWSB

      Great Western Federal Savings Bank

      Bellevue, WA

      PLIN

      P. Leiner Nutritional Products Corp.

      Torrance, CA

      NSSC

      Napco Security Systems, Inc.

      Copiague, NY

      NHSB

      New Hampshire Savings Bank Corp.

      Concord, NH

      NJNB

      New Jersey National Corporation

      Trenton, NJ

      NWOR

      Neworld Bank for Savings

      Boston, MA

      NWPS

      Northwestern Public Service Company

      Huron, SD

      NUTR

      Nutri-Foods Intl., Inc.

      Montgomery, NY

      PATS

      Patient Medical Systems Corporation

      Franklin Square, NY

      PGULF

      Pegasus Gold Inc.

      Vancouver, Canada

      PENT

      Pennsylvania Enterprises, Inc

      Wilkes-Barre, PA

      REYNA

      The Reynolds and Reynolds Company, Class A

      Dayton, OH

      RELL

      Richardson Electronics, Ltd.

      Franklin Park, IL

      ROBV

      Robotic Vision Systems, Inc.

      Hauppauge, NY

      RYAL

      Royale Airlines, Inc.

      Shreveport, LA

      SAYI

      S.A.Y. Industries, Inc.

      Leominster, MA

      SHEF

      Sandwich Chef, Inc.

      Birmingham, AL

      SMSI

      Scientific Micro Systems, Inc

      Mountain View, CA

      SPIR

      Spire Corporation

      Bedford, MA

      STAA

      STAAR Surgical Company

      Monrovia, CA

      THMD

      Thermedics Inc.

      Woburn, MA

      UFSB

      University Federal Savings Bank

      Seattle, WA

      VDEF

      Vie de France Corporation

      Vienna, VA

      WFSB

      Westchester Financial Services Corporation

      New Rochelle, NY

      WTLCA

      Western Tele-Communication Inc., Class A

      Englewood, CO

      The following changes to the list of NASDAQ/NMS securities occurred since October 1, 1984.

      NASDAQ/NMS Symbol AND/OR Name Changes

      New/Old Symbol

      New/Old Security Name

      Date of Change

      CNSL/CNSL

      Consul Restaurant Corporation/Consul Corporation

      10/8/84

      DRUGA/DRUGA

      Dart Group Corporation Class A/Dart Drug Corporation, Class A

      10/4/84

      NASDAQ/NMS Deletions

      Symbol

      Security Name

      Date

      AGSC

      AGS Computers, Inc.

      10/18/84

      AIGR

      American International Group

      10/11/84

      CGAC

      CGA Computer Associates, Inc.

      11/5/84

      FFAZ

      First Federal Savings & Loan Association of Arizona

      11/2/84

      MCQA

      McQuay, Inc.

      11/05/84

      PTIX

      Patient Technology, Inc.

      10/29/84

      On September 5, 1984, the Federal Reserve Board adopted a rule making all securities in the National Market System automatically eligible for credit or margin purchases. This rule becomes effective November 13, 1984 (NASD Notice to Members 84-57).

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202)728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-58 Thanksgiving Day: Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Thursday, November 22, 1984 in observance of Thanksgiving Day. "Regular Way" transactions made on the preceding business days will be subject to the settlement date schedule listed below.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      November 14

      November 21

      November 26

      15

      23

      27

      16

      26

      28

      19

      27

      29

      20

      28

      30

      21

      29

      December 3

      22

      Markets Closed

      23

      30

      4

      The above settlement dates should be used by brokers, dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6255.


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-57 Federal Reserve Board Acts to Grant Immediate Margin Status To All NASDAQ/NMS Issues

      TO: All NASD Members

      Effective November 13, 1984, all securities designated for inclusion in the NASDAQ National Market System will, as of the date of designation, become immediately marginable. This change is the result of recent amendments adopted by the Federal Reserve Board to its credit regulations governing the extension of credit by broker-dealers (Regulation T), banks (Regulation U), and other lenders (Regulation G). The Board's action was in response to recommendations of the NASD that the List of OTC Margin Stocks be expanded to include a greater increase of NASDAQ securities. As a direct result of the Board's action, 93 NASDAQ/NMS issues which are not currently margin eligible will become marginable on November 13.

      Prior to this rule change, the Board extended margin only to those issues either registered on a national securities exchange or deemed by the Board to be OTC Margin Stocks.

      Along with this new NASDAQ/NMS margin standard, the Board is adopting a new publication schedule for its List of OTC Margin Stocks. Under the revised schedule, the List will be published quarterly instead of three times a year. This new schedule will help to shorten the lag between the time a non-NASDAQ/NMS designated security becomes eligible for margin and the time it is actually available for margin trading.

      In a related matter, it is anticipated that the Securities and Exchange Commission will soon act on an NASD proposal to replace current NASDAQ/NMS criteria (which uses trading volume as the principal qualification filter) with the qualitative criteria currently prescribed for entry into the NASDAQ National Newspaper List. If approved by the SEC, the number of securities eligible for NASDAQ/NMS designation would increase from about 1,500 to 2,600 and, in so doing, another 750 non-margin National Newspaper List issues would become eligible for automatic marginability through designation as NASDAQ/NMS securities.

      For your convenience, we have included a reprint of the Board's adoption release as it appeared in the September 12, 1984, edition of the Federal Register. If you have any questions about this matter, please direct them to Gene Finn, Chief Economist, NASD, at (202) 728-8243.

      Sincerely,

      Gordon S. Macklin
      President

      Attachment

      FEDERAL RESERVE SYSTEM

      12 CFR Parts 207, 220, and 221

      Regulations G, T and U; Securities Credit Transactions; Amendment to definitions of "margin security" and "margin stock" and related technical amendments

      [Docket No. R-0512]

      AGENCY: Board of Governors of the Federal Reserve System.

      ACTION: Final rule.

      SUMMARY: The Board is amending the definition of "margin security" in Regulation T and the definitions of "margin stock" in Regulations G and U to give automatic marginability to any over-the-counter security identified as a National Market System (NMS) security in accordance with a designation plan of the National Association of Securities Dealers (NASD) that has been approved by the Securities and Exchange Commission (SEC). The Board will publish the List of OTC Margin Stocks on a new quarterly schedule. The Board's List will include NMS and non-NMS securities that otherwise meet the criteria for marginability established by the Board. Regulations G and U are also being amended to provide protection for lenders who may not have notice of a stock's designation between the Board's quarterly publication dates.

      EFFECTIVE DATE: November 13, 1984.

      FOR FURTHER INFORMATION CONTACT: Robert S. Plotkin, Assistant Director, Laura Homer, Securities Credit Officer, or Jamie Lenoci, Financial Analyst, Division of Banking Supervision and Regulation, (202) 452-2781.

      SUPPLEMENTARY INFORMATION:

      I. History of Amendment

      In response to a petition of the NASD, the Board published a proposed amendment to the margin regulations for comment that would give automatic marginability to any over-the-counter security designated as a National Market System (NMS) security (49 FR 9741, March 15, 1984). The Board is adopting the amendment in substantially the same form as proposed. However, due to comments received, the amendment has been technically revised to address some of the concerns of the respondents. In particular, language has been added to Regulations G and U to provide protection against inadvertent violations by lenders covered by those regulations who may not have actual notice that a particular stock has been designated as an NMS security. A similar provision is not being added to Regulation T because a broker is prohibited by statute from extending credit on securities that are not marginable: therefore such a provision is unnecessary.

      Determination of Status of OTC Stock's Marginability

      An OTC stock can become marginable (1) by meeting the criteria specified by the Board in its margin regulations (Regulations G, T and U) and actual inclusion on the Board's List of OTC Margin Stocks, or (2) by being designated as an NMS security in accordance with the designation plan of the NASD that has been approved by the SEC. Under SEC Rule 11Aa2-l (17 CFR 240.11Aa2-l), the qualification date for determining a "Tier 1" NMS security (which is a mandatory designation) is the last business day of the calendar quarter. To become a "Tier 2" NMS security (which is a voluntary designation) the issuer must meet "Tier 2" qualifying criteria and must apply for the NMS designation. Under the NASD's present procedures, it is contemplated that, in general, "Tier 2" NMS stocks will be added not more than once every other week. Notice will be given to the industry and regulators by the NASD at least one week prior to the effective date of the designation which, in the case of an initial public offering of a security, may be on a "when, as, and if issued" basis.

      In order to keep the public fully aware of which OTC stocks are marginable, the Board will publish quarterly a complete List of OTC Margin Stocks. This hard-copy publication will be on file at the Federal Register and can be obtained from the Board or any Federal Reserve Bank. In addition, the Board will publish a Supplement of additions to and deletions from the List of OTC Margin Stocks on a quarterly basis in the Federal Register. This Supplement will include current NMS securities as well as those securities deemed marginable under the Board's margin criteria. The publication of these Supplements will be timed to coincide with the NASD's quarterly inclusion of Tier 1 NMS securities. Since the next designation of the Tier 1 NMS securities is expected to be effective on November 13, 1984, the Board's Supplement to the List, ordinarily effective in October, will be delayed to coincide with this November date. Future Supplements of additions to and deletions from the List will be published quarterly in the Federal Register at the end of January, April, July and October with the usual two-week delayed effective date. There will be no SEC publication of NMS securities in the Federal Register as contemplated in the Board's original proposal.

      Additional OTC securities may be designated by the NASD as NMS securities in the interim between Board publications. These securities will be automatically marginable at broker-dealers upon the effective date of their designation. A list of these securities and the effective date of their designation will be available at the Public Reference Branch of the SEC and copies will be hand delivered to the Board and delivered by overnight express to each of the Reserve Banks. Banks, broker-dealers, Regulation G lenders and other persons can verify whether an OTC stock is an NMS security by calling the SEC at its Public Reference Branch, 450 5th Street, NW., Washington, D.C. 20549 ((202) 272-7450). The margin status of any OTC stock can be obtained by calling the Securities Regulation Section in the Board's Division of Banking Supervision and Regulation ((202) 452-2781) or by calling any Federal Reserve Bank.

      Final Regulatory Flexibility Analysis

      The Board is amending its regulations to give automatic marginability to securities that are designated as qualified for trading in the National Market System. The initial regulatory flexibility analysis indicated that the amendment was not expected to have any adverse impact on a substantial number of small entities.

      A comment on the proposed change raised the question of whether the Board discriminated against small business by not adopting the original NASD proposal, which asked for automatic marginability to securities on the entire National List. The decision to permit National Market System securities to be marginable was based on staff analysis indicating that the liquidity and other characteristics of NMS securities compare favorably with those of exchange-traded securities. A major difference between NMS and other National List securities is that the latter do not have "last sale" reporting, deemed necessary by stock exchanges to assure the availability of reliable price information. In the absence of such information and in light of other evidence suggesting differences in liquidity among National List securities, the Board decided to give automatic marginability at the present time only to National List securities traded in the NMS.

      There is no evidence indicating that the regulatory change will have a significant impact on a substantial number of small businesses. If stocks of small entities are traded in the National Market System, they will be marginable at a brokerage firm after the regulatory change becomes effective. Small entities and other companies comprising the approximately 800 National List firms that are not on the NMS and that are not on the Board's List of OTC Margin Stocks will not be automatically marginable but, of course, may become marginable subject to satisfying Board OTC criteria. From the individual corporation's perspective, the economic effect of marginability is mixed. When securities become eligible as collateral in a margin account at a brokerage firm, they also become subject to regulatory limitations on the amount of credit that may be extended against their value by banks and other lenders; such limitations do not apply to nonmarginable stocks at banks and other lenders.

      List of Subjects

      12 CFR Part 207

      Banks, Banking, Credit, Margin, Margin requirements, Reporting and recordkeeping requirements. Securities.

      12 CFR Part 220

      Bank's, Banking, Brokers, Credit. Margin, Margin requirements, Investments, Reporting and recordkeeping requirements. Securities.

      12 CFR Part 221

      Banks, Banking, Credit, Margin, Margin requirements, Reporting and recordkeeping requirements, Securities.

      Accordingly, pursuant to sections 7 and 23 of the Securities Exchange Act of 1934, as amended (15 U.S.C. 78g and 78w), the Board amends Regulations G, T and U (12 CFR Parts 207, 220 and 221, respectively) in the following manner:

      Section 207.2—"Definitions", is amended by adding a new paragraph (i)(3), and renumbering (i)(3), (4) and (5) to (i)(4). (5) and (6).

      Section 207.3—"General Requirements", is amended by adding a new paragraph (q).

      Section 220.2—"Definitions", is amended by inserting a new item in paragraph (o), between the second and third item and numbering the items (o)(l), (2), (3), (4) and (5).

      Section 221.2—"Definitions", is amended by adding a new paragraph (h){3) and renumbering (h)(3), (4) and (5) to (h)(4), (5) and (6).

      Section 221.3—"General Requirements", is amended by adding a new paragraph (1).

      The amended paragraphs in Regulations G, T and U read as follows:

      § PART 207—SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS

      1. Section 207.2—"Definitions", is amended by revising paragraph (i) to read as follows:

      § 207.2 Definitions

      * * * * *

      (i) "Margin stock" means:
      (1) Any equity security registered or having unlisted trading privileges on a national securities exchange;
      (2) Any OTC margin stock;
      (3) Any OTC security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (NMS Security);
      (4) Any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock;
      (5) Any warrant or right to subscribe to or purchase a margin stock; or
      (6) Any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other than:
      (i) A company licensed under the Small Business Investment Company Act of 1958, as amended (15 U.S.C. 661); or
      (ii) A company which has at least 95 percent of its assets continuously invested in exempted securities (as defined in 15 U.S.C. 78c(12)).
      2. Section 207.3—"General Requirements", is amended by adding a new paragraph (g).

      § 207.3 General Requirements

      * * * * *

      (q) Lack of notice of NMS security designation. Failure to treat an NMS security as a margin stock in connection with an extension of credit shall not be deemed a violation of this part if the designation is made between quarterly publications of the Board's List of OTC Margin Stocks and the lender does not have actual notice of the designation.

      PART 220—CREDIT BY BROKERS AND DEALERS

      1. Section 220.2—"Definitions", is amended by revising paragraph (o) to read as follows:

      § 220.2 Definitions.

      * * * * *

      (0) "Margin security" means:
      (1) Any registered security;
      (2) Any OTC margin stock;
      (3) Any OTC margin bond;
      (4) Any OTC security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (NMS security); or
      (5) Any security issued by either an open-end investment company or unit investment trust which is registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8).

      PART 221—CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCKS

      1. Section 221.2—"Definitions", is amended by revising paragraph (h) to read as follows:

      § 221.2 Definitions.

      * * * * *

      (h) "Margin stock" means:
      (1) Any equity security registered or having unlisted trading privileges on a national securities exchange;
      (2) Any OTC margin stock;
      (3) Any OTC security designated as qualified for trading in the National Market System under a designation plan approved by the Securities and Exchange Commission (NMS security);
      (4) Any debt security convertible into a margin stock or carrying a warrant or right to subscribe to or purchase a margin stock;
      (5) Any warrant or right to subscribe to or purchase a margin stock; or
      (6) Any security issued by an investment company registered under section 8 of the Investment Company Act of 1940 (15 U.S.C. 80a-8), other than:
      (i) A company licensed under the Small Business Investment Company Act of 1958, as amended (15 U.S.C. 661); or
      (ii) A company which has at least 95 percent of its assets continuously invested in exempted securities (as defined in 15 U.S.C. 78c(12)).
      2. Section 221.3—"General Requirements", is amended by adding a new paragraph (1).

      § 221.3 General requirements.

      * * * * *

      (1) Lack of notice of NMS security designation. Failure to treat an NMS security as a margin stock in connection -with an extension of credit shall not be deemed a violation of this part if the designation is made between quarterly publications of the Board's List of OTC Margin Stocks and the bank does not have actual notice of the designation.

      By order of the Board of Governors of the Federal Reserve System, September 5, 1984.

      William W. Wiles,
      Secretary of the Board.

      [FR Doc. 84-24010 Filed 9-11-84; 8:45 am]

      BILLING CODE 8210-01-M

    • 84-56 Three Securities Mandated to Join NASDAQ/NMS on November 13, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      Three additional securities will join the NASDAQ National Market System on Tuesday, November 13, 1984. These three securities have met the NASDAQ/NMS mandatory designation requirements as of the end of the third quarter and, as required by SEC Rule HAa2-l, automatically are added to NASDAQ/NMS within 45 days of the quarter ending date.

      The three securities joining NASDAQ/NMS on Tuesday, November 13, are:

      Symbol

      Company

      Location

      CADBY

      Cadbury Schweppes, PLC (ADR)

      London, England

      MTVN

      MTV Networks, Inc.

      New York, NY

      PHCI

      Peak Health Care, Inc

      Colorado Springs, CO

      Any questions regarding the phase-in of these securities should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman, Market Surveillance, at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-55 Implementation of NASDAQ Equity Audit Trail

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: All NASD Members

      The NASDAQ market has over the past several years experienced a sustained period of growth which in many ways is attributable to the use of technologically advanced facilities and systems that have served to enhance the quality of this marketplace. The significant growth and visibility of the NASDAQ market, along with the anticipated addition of NASDAQ options, has underscored the need for increased use of state-of-the-art automation and technology to facilitate continued improvements in the regulatory programs affecting NASDAQ securities. In recognizing this need and as a result of the SEC's emphasis on improved automated surveillance capabilities on NASDAQ and the exchange markets, the NASD Board of Governors, on July 13, 1984, approved an Association plan for the development of a NASDAQ Equity Audit Trail.

      The NASDAQ Equity Audit Trail will embody trade-for-trade detail in NASDAQ securities and listed securities traded off-board by all participants, which will include:

      • security identifier
      • price of the trade
      • size of the trade
      • time of trade
      • clearing firm - buy side
      • clearing firm - sell side
      • executing firm - buy side and capacity (principal or agent)
      • executing firm - sell side and capacity (principal or agent)
      • trade reference number of automated executions (i.e., SOES, CAE)

      Although several of the above-listed items are already available through NASDAQ and/or clearing corporation systems, the collection and processing of those key elements which are not presently available will require additional information from members. Most significant among these are:

      • An expanded level of transaction information to be provided by members to the clearing corporations to include "time of trade" and a capacity indicator (principal/agency) for each transaction in a NASDAQ security.
      • Additional information to be included by members in real time trade reportable securities to include a "buy/sell" indicator (NASDAQ/NMS and off-board trades).
      • Audit trail information to be provided by members to the clearing corporations for internalized trades in non-trade reported NASDAQ securities.
      • The submission of trades in NASDAQ securities between members now done ex-clearing to a clearing facility.

      The NASDAQ Equity Audit Trail will be implemented in seven phases, with each phase containing steps designed to assure that all aspects of the audit trail will be accomplished in a way which maintains the accuracy and completeness of the information collected. Priorities associated with the development of the NASDAQ Options Program have been taken into account in the sequencing of these phases so that the NASDAQ Equity Audit Trail for trade reportable securities will be available at the earliest stage possible. The seven phases of the Audit Trail Plan are as follows:

      Phase

      I

      Capturing time of trade and a capacity (principal/agency) indicator by clearing corporations.

      Phase

      II

      Trade reporting changes for inclusion of a buy or sell indicator for reporting firms.

      Phase

      III

      On-line audit trail retrieval capabilities in the form of an integrated journal.

      Phase

      IV

      TARS Phase II - including mandatory submission of trades between NASD members to a clearing corporation.

      Phase

      V

      Mandatory submission of internalized trades in non-trade reported NASDAQ securities to a clearing corporation.

      Phase

      VI

      Inclusion of Form T information with the audit trail.

      Phase

      VII

      Inclusion of news headlines as part of the audit trail data.

      Phases I and II are tentatively scheduled for implementation beginning during the second quarter of 1985. This projection is, of course, dependent on timetables established by the clearing corporations, with whom the Association is closely coordinating, and the ability of members to adapt to new clearing input formats. In this regard, every effort will be made by the Association to assure that members are given adequate assistance and time to make necessary internal system or procedural changes to accommodate the data collection processes.

      Trade reporting rule changes will be made under Schedule D and G of the Association's By-Laws to reflect the additional requirement to report a buy or sell indicator for each trade report.

      Members will be kept apprised of developments regarding the NASDAQ Equity Audit Trail well in advance of scheduled implementation dates for the various phases. In this connection, the clearing corporations will be providing guidance on changes effecting member clearing input within the next several weeks.

      Should you have specific questions or wish to discuss any aspects of NASDAQ Equity Audit Trail requirements as they relate to your firm, please contact Christopher Franke, Director, Market Surveillance, at (202) 728-8186 for changes in trade reporting rules or Robert Primmer, Assistant Director, Systems Development, at (212) 839-6223 for matters affecting changes to clearance procedures.

      Sincerely,

      Frank J. Wilson
      Executive Vice President and General Counsel

    • 84-54 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the third quarter of 1984. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006.

      Notice Number

      Date

      Topic

      84-36

      July 18, 1984

      Request for Comments on Possible Amendments to Venture Capital Restrictions

      84-37

      July 18, 1984

      Interpretation of Venture Capital Restrictions

      84-38

      July 13, 1984

      Five Securities Mandated to Join NMS August 7, 1984

      84-39

      July 25, 1984

      Quarterly Checklist of Notices to Members

      84-40

      July 26, 1984

      Compensation Arrangements With Respect to Sale of Mutual Fund Shares

      84-41

      July 30, 1984

      40 More Securities to Join NMS on August 14

      84-42

      August 9, 1984

      Labor Day: Trade Date-Settlement Date Schedule

      84-43

      August 9, 1984

      NASDAQ Market Open on Election Day, November 6, 1984

      84-44

      August 31, 1984

      Amendments to the Uniform Practice Code Sections 5, 9,12 and 30

      84-45

      August 31, 1984

      Request for Comments on a Proposed New Section to the Uniform Practice Code Concerning Customer Account Transfers

      84-46

      August 31, 1984

      SEC Approval of Revised Rules for Bunching of NASDAQ/NMS Trades

      84-47

      September 4, 1984

      Adoption of Amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice

      84-48

      September 4, 1984

      New SEC Staff Interpretation Concerning the Treatment of Concessions Receivable and Related Concessions Payable Under the Uniform Net Capital Rule

      84-49

      September 6, 1984

      32 More Securities to Join NASDAQ/NMS on September 18

      84-50

      September 18, 1984

      Trade Date-Settlement Dates for October and Early November

      84-51

      September 28, 1984

      Amendments to Code of Arbitration Procedure

      * * *

    • 84-53 Request for Comments on Proposed Amendment to Appendix F Concerning Suitability Requirements for Freely Tradeable Partnership Units

      TO: All NASD Members and Other Interested Persons

      Attention: Direct Participation Programs Department

      COMMENTS MUST BE RECEIVED BY NOVEMBER 8, 1984

      The Association's Board of Governors has approved for membership comment a proposed amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice. Appendix F contains rules and regulations relating to public offerings of direct participation programs. The proposed amendment would liberalize the special suitability criteria contained in Section 3(b) of Appendix F by exempting from its provisions direct participation programs which are quoted on NASDAQ or listed on an exchange. The text of the proposed amendment is attached to this Notice.

      All comments received during the comment period will be reviewed by the Association's Direct Participation Programs Committee and the Board of Governors. If the Board of Governors approves the proposal or an amended version resulting from comments received, it must be filed with the Securities and Exchange Commission for approval.

      Background and Explanation of Proposed Amendment

      It has become increasingly common for direct participation programs to issue freely tradeable units or to place units of limited partnership interest in a depositary and issue depositary receipts for such units. Such units and depositary receipts are freely tradeable in a manner generally analogous to common stock and evidence entitlement to a portion of a program's income, gains, losses, deductions, credits and distributions.

      Section 3(b) of Appendix F requires members in "recommending the purchase, sale or exchange of an interest in a direct participation program" to obtain certain enumerated information, make an affirmative finding of suitability, and retain a record of the basis for that finding in its files. These requirements were specifically included in light of the general absence of liquidity in the market for limited partnerships as well as to assure that the unique tax status and investment characteristics of these programs be considered in secondary market transactions as well as initial distributions. With the emergence of active trading markets for certain programs, however, questions have arisen as to the applicability of these requirements to transactions in NASDAQ quoted or exchange-listed programs.

      The Committee and the Board reviewed the purposes of the special suitability requirements and concluded that freely tradeable program units present liquidity, tax and investment considerations which are different from those for other partnership securities. It was also concluded that where an active trading market exists, potentially adverse consequences to an investor resulting from such unique considerations can be remedied by quickly liquidating the investor's holdings. Ordinarily, investors may be forced to bear those consequences in the absence of an active secondary market.

      With the above distinction in mind, the Committee and the Board concluded that it would be appropriate to amend Appendix F to exempt transactions in direct participation programs which are quoted on NASDAQ or listed on an exchange from the special suitability requirements contained in Section 3(b). Such transactions would, however, remain subject to the general suitability requirements contained in Article III, Section 2 of the Rules of Fair Practice.

      It is important to note that the proposed amendment would relate only to freely tradeable partnership units or depositary receipts quoted on NASDAQ or listed on a registered securities exchange. Members will still be expected to assure compliance with the suitability requirements of Section 3(b) of Appendix F in all initial public offerings of and secondary market transactions in other direct participation programs. In addition, the provisions of Section 3(a), which requires the establishment and disclosure of investor suitability standards in the prospectus, remain applicable to all public offerings of direct participation programs.

      All written comments should be addressed to the following:

      James M. Cangiano, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by November 8, 1984. All comments received will be made available for public inspection.

      Any questions regarding this notice should be directed to Suzanne E. Rothwell of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President'
      Legal and Compliance Department

      Attachment

      Proposed Amendment to Appendix F to Article III, Section 34 of the Rules of Fair Practice *

      Section 3(b)

      In recommending to a participant the purchase, sale or exchange of an interest in a direct participation program, a member or person associated with a member shall:

      (1) have reasonable grounds to believe, on the basis of information obtained from the participant concerning his investment objectives, other investments, financial situation and needs, and any other information known by the member or associated person, that:
      (i) the participant is or will be in a financial position appropriate to enable him to realize to a significant extent the benefits described in the prospectus, including the tax benefits where they are a significant aspect of the program;
      (ii) the participant has a fair market net worth sufficient to sustain the risks inherent in the program, including loss of investment and lack of liquidity; and
      (iii) the program is otherwise suitable for the participant; and
      (2) maintain in the files of the member documents disclosing the basis upon which the determination of suitability was reached as to each participant ;provided however that this subsection 3(b) shall not apply to a secondary public offering of or a secondary market transaction in a unit, depositary receipt, or other interest in a direct participation program for which quotations are displayed on the NASDAQ System or is listed on a registered national securities exchange.

      * New language is underlined.


    • 84-52 Next NASDAQ/NMS Phase-In Scheduled for October 16

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      Another 34 issues are scheduled to join the NASDAQ National Market System on Tuesday, October 18, making the total issues in NASDAQ/NMS 1,105. These 34 securities, which will begin trading under real-time trade reporting, meet the Securities and Exchange Commission's criteria for voluntary designation.

      The 34 issues scheduled to join NASDAQ/NMS on, Tuesday, October 16 are:

      Symbol

      Company

      Location

      SOFA

      Bench Craft, Inc.

      Blue Mountain, MS

      CASY

      Casey's General Stores, Inc.

      Des Moines, IA

      CFBS

      Central Fidelity Banks, Inc.

      Richmond, VA

      CTME

      Clothestime, Inc. (The)

      Anaheim, CA

      COKE

      Coca-Cola Bottling Company Consolidated

      Charlotte, NC

      CESC

      Computer Entry Systems Corp.

      Silver Spring, MD

      EGLA

      Eagle Telephonies, Inc.

      Hauppauge, NY

      EGLAW

      Eagle Telephonies, Inc. (Wts)

      Hauppauge, NY

      ELCH

      El Chieo Corp.

      Dallas, TX

      ENDL

      Endo-Lase Inc.

      New York, NY

      ENDLW

      Endo-Lase Inc. (Wts)

      New York, NY

      ERICY

      Ericsson (L.M.) Telephone Co.

      Stockholm, Sweden

      XOVR

      Exovir, Inc.

      Great Neck, NY

      FFMY

      First Federal Savings and Loan Association of Fort Myers

      Fort Myers, FL

      FNAC

      First National Cincinnati Corporation

      Cincinnati, OH

      ISCX

      Integrated Software Systems Corporation

      San Diego, CA

      ISMX

      Isomedix, Inc.

      Whippany, NJ

      KIMB

      Kimbark Oil & Gas Co.

      Denver, CO

      MFLX

      Mediflex Systems

      Evanstown, IL

      MBAK

      Merchants Savings Bank

      Manchester, NH

      NORKZ

      Norsk Data A.S. (Cl A)

      Oslo, Norway

      ORFA

      ORFA Corp. of America

      Cherry Hill, NJ

      OKEN

      Old Kent Financial Corporation

      Grand Rapids, MI

      TONE

      One Bancorp (The)

      Portland, ME

      OVER

      Overland Express, Inc.

      Blaine, MN

      POFO

      PO Folks, Inc.

      Nashville, TN

      LEGL

      Pre-Paid Legal Services, Inc.

      Ada, OK

      SFGD

      Safeguard Health Enterprises, Inc.

      Whittier, CA

      SHLM

      Schulman (A.), Inc.

      Akron, OH

      SSIAA

      Stockholder Systems, Inc. (Cl A)

      Atlanta, GA

      SUPX

      Supertex, Inc.

      Sunnyvale, CA

      TIME

      Time Energy Systems, Inc.

      Houston, TX

      TLCR

      Telecrafter Corporation

      Lakewood, CO

      TOFU

      Tofu Time, Inc.

      Brooklyn, NY

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trading reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-51 Amendments to Code of Arbitration Procedure

      TO: All NASD Members

      On September 7, 1984, the Securities and Exchange Commission ("Commission" or "SEC") approved amendments to the Association's Code of Arbitration Procedure. These rule changes will be effective on October 1, 1984. A summary of the major provisions and the text of the rule changes follows.

      The amendments are intended to conform the provisions of the Association's Code of Arbitration Procedure to recent amendments to the uniform arbitration code (the "Uniform Code") which has been developed by the Securities Industry Conference on Arbitration ("SICA"). SICA is composed of representatives of the Association, nine other self-regulatory organizations, four public members, and the Securities Industry Association. The Uniform Code, as implemented by the various self-regulatory organizations, has established throughout the securities industry a uniform system of arbitration procedures.

      MAJOR PROVISIONS

      1. Jurisdiction: The amendment to the Code's time limitation provision would permit a court which has jurisdiction over a claim to direct that the claim be resolved by arbitration. Currently, if the claim is six years old or more, the Association and other self-regulatory organizations could not accept the matter for arbitration. The change will make the Code's time limitation co-extensive with various state statutes of limitations and permit all securities-related disputes which are eligible for a judicial disposition to be resolved by arbitration.
      2. Fees: The amendment increases the upper dollar limit for Small Claim submissions by public customers from $2,500 to $5,000. This should help alleviate the strain on the Association's arbitration pool and is of particular importance in view of the continued, substantial increase in case filings in this dollar range.
      In addition, the increases in certain arbitration fees are reasonable and reflect the results of inflation in the years since the Code's adoption.
      3. Procedures: The amendments also describe the arbitrators' discretion to bar the presentation by the Respondent of certain facts and defenses not disclosed to the Claimant prior to hearing. This amendment should result in more complete answers filed by Respondents.

      Other minor amendments expand the procedural rights afforded to all parties. The amendments provide that the Director of Arbitration may determine preliminarily whether multiple Claimants, Respondents and/or Third Party Respondents are to proceed in the same or separate arbitrations. Also, Claimants, Respondents, and Third Party Respondents will have the right to one peremptory challenge and unlimited challenges for cause. The Director of Arbitration will be given the discretion to extend the time period allowed for a party to challenge an arbitrator when necessary (e.g., when a party requires more time to investigate the background of an arbitrator prior to making a decision regarding the use of a peremptory challenge). Finally, the amendment will allow parties to amend pleadings prior to the appointment of an arbitration panel.

      * * * *

      Questions concerning the Notice may be directed to Deborah Masucci, Director of Arbitration, at telephone number (212) 839-6246, Dennis C. Hensley, Vice President and Deputy General Counsel, at telephone number (202) 728-8245, or Jean Ivey McNeill, Senior Attorney, at telephone number (202) 728-8286.

      Very truly yours,

      Frank J. Wilson
      Executive Vice President and General Counsel

      AMENDMENTS TO THE CODE OF ARBITRATION PROCEDURE

      (New language is underlined, deletions are indicated by brackets)

      Simplified Arbitration

      Sec. 13. (a) Any dispute, claim or controversy, arising between a public customer(s) and an associated person or a member subject to arbitration under this Code involving a dollar amount not exceeding [ $2,500.00] $5,000.00, exclusive of attendant costs and interest, shall upon demand of the customer(s) or by written consent of the parties, be arbitrated as hereinafter provided.

      (b) (No change)
      (c) The Claimant shall pay the sum of $15.00 if the amount in controversy is $1,000 or less, $25.00 if the amount is more than $1,000.00 but $2,500 or less, or $100.00 if the amount in controversy is more than $2,500, but does not exceed $5,000 upon filing of the Submission Agreement. The final disposition of the sum shall be determined by the arbitrator.
      (d) The Director of Arbitration shall endeavor to serve promptly, by mail or otherwise, on the Respondent(s) one (1) copy of the Submission Agreement and one (1) copy of the Statement of Claim. The Respondent(s) shall, within twenty (20) calendar days from receipt of service, file with the Director of Arbitration one (1) executed Submission Agreement and one (1) copy of Respondent's answer, together with supporting documents. The Answer shall designate all available defenses to the Claim and may set forth any related Counterclaim and/or related Third Party Claim the Respondent(s) may have against the Claimant or any other person. If the Respondent(s) has interposed a Third Party Claim, the Director of Arbitration shall endeavor to serve promptly by mail or otherwise a copy of same, together with a copy of the Submission Agreement on such Third Party who shall respond in the manner herein provided for response to the Claim. If the Respondent(s) files a related Counterclaim exceeding [2,500.00] $5,000, the arbitrator may refer the Claim, Counterclaim and/or Third Party Claim, if any, to a panel of three (3) or five (5) arbitrators in accordance with Section 19 of this Code, or he may dismiss the Counterclaim and/or Third Party Claim without prejudice to the Counterclaimant(s) and/or Third Party Claimant(s) pursuing the Counterclaim and/or Third Party Claim in a separate proceeding.

      Time Limitation Upon Submission

      Sec. 15. No dispute, claim, or controversy shall be eligible for submission to arbitration under this Code [in any instance ] where six (6) years have elapsed from the occurence or event giving rise to the act or dispute, claim or controversy. This section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration by a court of competent jurisdiction.

      Tolling of Time Limitation(s) for the Institution of Legal Proceedings and Extension of Time Limitation(s) for Submission to Arbitration

      Sec. 18. (a) Where permitted by applicable law, the time limitations which would otherwise run or accrue for the institution of legal proceedings shall be tolled where [all the parties shall have filed duly executed Submission Agreements upon the dispute, claim or controversy submitted to arbitration] a duly executed Submission Agreement is filed by the Claimant(s). The tolling shall continue for such period as the Association shall retain jurisdiction upon the matter submitted.

      (b) The six (6) year time limitation upon submission to arbitration shall not apply when the parties have submitted the dispute, claim or controversy to a court of competent jurisdiction. The six (6) year time limitation shall not run for such period as the court shall retain jurisdiction upon the matter submitted.

      Peremptory Challenge

      Sec. 22. In any arbitration proceeding [ being heard by a panel consisting of more than one (l) arbitrator], each party shall have the right to one peremptory challenge. In arbitrations where there are multiple Claimants, Respondents and/or Third Party Respondents, the Claimants shall have one peremptory challenge, the Respondents shall have one peremptory challenge and the Third Party Respondents shall have one peremptory challenge, unless the Director of Arbitration determines that the interests of justice would best be served by awarding additional peremptory challenges. Unless extended by the Director of Arbitration, [A] a party wishing to exercise a peremptory challenge must do so by notifying the Director of Arbitration in writing within five (5) business days of notification of the identity of the persons named to the panel. There shall be unlimited challenges for cause.

      Initiation of Proceedings

      Sec. 25. Except as otherwise provided herein, an arbitration proceeding under this Code shall be instituted as follows:

      Statement of Claim

      (a) (No change)

      Answer — Defenses, Counterclaims and/or Cross-Claims

      (b)
      (l) The Respondent(s) shall within twenty (20) business days from receipt of service file with the Director of Arbitration one (1) executed Submission Agreement and one (1) copy of the Respondent's(s') Answer. The Answer shall [designate all available defenses to the Statement of Claim] specify all available defenses and the relevant facts thereto that will be relied upon at hearing and may set forth any related Counterclaim the Respondent(s) may have against the Claimant and any Third Party Claim against any other party or person upon any existing dispute, claim or controversy subject to arbitration under this Code.
      (2)
      (i) A Respondent, Responding Claimant, Cross-Claimant or Third-Party Respondent who pleads only a general denial as an answer may, upon written objection by the adversary party before the hearing to the Director of Arbitration, in the discretion of the arbitrators, be barred from presenting any facts or defenses at the time of the hearing.
      (ii) A Respondent, Responding Claimant, Cross-Claimant or Third-Party Respondent who fails to specify all available defenses and the relevant facts thereto may, upon objection by the adversary party, in the discretion of the arbitrators, be barred from presenting such facts or defenses not included in such party's answer at the hearing.

      Note: The present subsections (2), (3), (4) hereunder will remain as presently in the Code, but will be renumbered (3), (4) and (5) respectively.

      Joining and Consolidation — Multiple Parties

      (c)
      (1) (No change)
      (2) For purposes of this subsection, the Director of Arbitration shall be authorized to determine preliminarily whether a claim is directly related to the matter in dispute and to join any other party to the dispute and to consolidate the matter for hearing and award purposes. In arbitrations where there are multiple Claimants, Respondents and/or Third Party Respondents, the Director of Arbitration shall be authorized to determine preliminarily whether such parties should proceed in the same or separate arbitrations.
      (3) All final determinations with respect to joining [and], consolidation and multiple parties under this subsection shall be made by the arbitration panel.

      Amendments

      Sec. 39. [ No amendment to the pleadings shall be permitted after receipt of a responsive pleading except upon the consent of the arbitrators and upon such terms and conditions as they may direct. ]

      (a) After the filing of any pleadings, if a party desires to file a new or different pleading, such change must be made in writing and filed with the director of Arbitration. The Director of Arbitration shall endeavor to serve promptly by mail or otherwise upon all other parties a copy of said change. The other parties may, within ten (10) business days from the receipt of service, file a response with the Director of Arbitration.
      (b) After a panel has been appointed, no new or different pleading may be filed except for a responsive pleading as provided for in (a) above or with the panel's consent.

      Schedule of Fees

      Sec. 43. (a) At the time of filing a Submission Agreement, a Claimant shall deposit with the Association the amount indicated below unless such deposit is specifically waived by the Director of Arbitration.

      Amount in Dispute
      (Exclusive of interest and expenses)

      Deposit

      [ $2,500 or less]

      [ $50 ($15 for Simplified Arbitration, Section 13)]

      $1,000 or less

      $15

      Above $1,000 but not exceeding $2,500

      $25

      Above $2,500 but [less than]
      not exceeding $5,000

      $100

      Above $5,000 [ or more but less than]
      but not exceeding $10,000

      $200

      Above $10,000 [ or more but less than]
      but not exceeding $20,000

      [$250]$300

      Above $20,000 [ or more but less than]
      but not exceeding $100,000

      [$350] $500

      Above $100,000[and over]

      [$550]$750

      Where the amount in dispute is [ less than] $10,000 or less, no additional deposits shall be required despite the number of sessions. Where the amount in dispute is above $10,000 [or more] and multiple sessions are required, the arbitrators may require any of the parties to make additional deposits for each additional session. In no event shall the aggregate amount deposited per session exceed the amount of the initial deposit as set forth in the above schedule.

      (b) The arbitrators, in their awards, may determine the amount chargeable to the parties as forum fees (fees) and shall determine by whom such fees shall be borne. Where the amount in dispute is [less than ]$10,000 or less, total fees in the parties shall not exceed the amount deposited. Where the amount in dispute is above $10,000 [or more] but [less than] does not exceed $20,000, the maximum fee shall be [$250] $300 per session. Where the amount in dispute is above $20,000[ or more] but [less than] does not exceed $100,000, the maximum fee shall be [$350 ]$500 per session. Where the amount in dispute is above $100,000 [or more], the maximum fee shall be[ $550] $750 per session. In no event shall the fees assessed by the arbitrators exceed[ $550] $750 per session. Amounts deposited by a party shall be applied against fees, if any. If the fees are not assessed against a party who had made a deposit, the deposit will be refunded.
      (c) If the dispute, claim or controversy does not involve or disclose a money claim, the amount to be deposited by the Claimant shall be $100, or such amount as the Director of Arbitration or the panel of arbitrators may require, but shall not exceed[ $550] $750.
      (d) (No change)
      (e) (No change)
      (f) The arbitrators may assess forum fees and Section 43 costs in any matter settled or withdrawn subsequent to the commencement of the first session.

    • 84-50 Trade Date — Settlement Dates for October and Early November

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Transactions made on Monday, October 8, Columbus Day; Tuesday, November 6, Election Day; and Monday, November 12, Veterans Day, and the days immediately preceding these days, will be subject to the schedule below. The purpose of this schedule is to provide uniformity since, while the NASDAQ System and other securities markets will be open on these days, many banking institutions will be closed.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      October 1

      October 9

      October 10

      2

      10

      11

      3

      11

      12

      4

      12

      15

      5

      15

      16

      8

      15

      17

      October 30

      November 7

      November 8

      31

      8

      9

      November 1

      9

      12

      2

      13

      13

      5

      14

      14

      6

      14

      15

      7

      15

      16

      8

      16

      19

      9

      19

      20

      12

      19

      21

      October 8, November 6, and November 12 will not be considered business days for determining the day for settlement of a trade, the day on which stock shall be quoted ex-dividend or ex-rights, or in computing interest on bond trades. Marks to the market, reclamations, and close-outs should not be made on these days.

      It should be noted that October 8, November 6, and November 12 shall be considered as business days for receiving customers' payments under Regulation T of the Federal Reserve Board.

      The foregoing settlement dates should be used by broker-dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-49 32 More Securities to Join NASDAQ/NMS on September 18, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      With the 32 issues joining the NASDAQ/National Market System on Tuesday, September 18, 1984, there will be 1,078 securities trading under real-time trade reporting. These 32 issues meet the SEC's voluntary designation criteria.

      The 32 securities scheduled to be phased into NASDAQ/NMS on September 18 are:

      SYMBOL

      COMPANY

      LOCATION

      ASEC

      American Security Corporation

      Washington, D.C.

      AMWS

      AmeriWest Financial Corporation

      Albuquerque, NM

      BNHN

      Benihana National Corp.

      Miami, FL

      BNHNW

      Benihana National Corp. (Wts)

      Miami, FL

      CALSF

      California Silver Ltd.

      Vancouver, BC

      CTYN

      City National Corp.

      Beverly Hills, CA

      CPCI

      Ciprico Inc.

      Plymouth, MN

      CLCH

      Clear Channel Communications, Inc.

      San Antonio, TX

      CFGRS

      Commonwealth Financial Group Real Estate Investment Trust

      Houston, TX

      CUCD

      Comp-U-Card International Inc.

      Stamford, CT

      CIDN

      Computer Identics Corporation

      Canton, MA

      KONX

      EIKONIX Corporation

      Bedford, MA

      EOILD

      Energy Oil, Inc.

      Longmont, CO

      FITB

      Fifth Third Bancorp

      Cincinnati, OH

      FSCO

      First Security Corporation

      Salt Lake City, UT

      FUDD

      Fuddruckers, Inc.

      San Antonio, TX

      IDTI

      Integrated Device Technology, Inc.

      Santa Clara, CA

      IOMG

      Iomega Corporation

      Ogden, UT

      KVPH

      K V Pharmaceutical Co.

      St. Louis, MO

      KEYC

      Keystone Camera Products Corporation

      Clifton, NJ

      LMRK

      Landmark Savings Association

      Pittsburgh, PA

      PGLOY

      Philips (NV) Gloeilampenfabrieken

      Eindhoven, Netherlands

      RADX

      Radionics, Inc.

      Salinas, CA

      RDGC

      Reading Company

      Philadelphia, PA

      RIOC

      Royal International Optical Corporation

      Dallas, TX

      RPAL

      Royal Palm Savings Association

      West Palm Beach, FL

      SHOS

      Southern Hospitality Corp.

      Nashville, TN

      SNMD

      Sunrise Medical, Inc.

      Torrance, CA

      UFURF

      Universal Furniture Limited

      Hong Kong

      VIRA

      Viratek, Inc.

      Covina, CA

      WALB

      Walbro Corporation

      Cass City, MI

      WCHI

      Westworld Community Health Care, Inc.

      Lake Forest, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trading reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-48 New SEC Staff Interpretation Concerning the Treatment of Concessions Receivable and Related Concessions Payable Under the Uniform Net Capital Rule

      IMPORTANT

      PLEASE DIRECT THIS NOTICE TO ALL FINANCIAL AND OPERATIONAL OFFICERS AND PARTNERS

      TO: All NASD Members and Other Interested Persons

      In NASD Notice to Members 81-12, the Association advised the membership of the SEC's Division of Market Regulation interpretation concerning the treatment of concessions receivable and related commissions payable under the Uniform Net Capital Rule (SEC Rule 15c3-l). The Commission took the position at that time that concessions receivable must be deducted from net worth in computing net capital and that any related commissions payable be included in the computation of aggregate indebtedness. However, it said it would not recommend any action if concessions receivable were not deducted from net capital to the extent they are offset by related commissions payable to sales representatives or unaffiliated selling group members provided that the following four conditions were met:

      (a) a written contract exists between the broker/dealer and sales representative or unaffiliated selling group member, whereby the sales representative or unaffiliated selling group member waives payment of the commission until the broker/dealer is in receipt of the concession;
      (b) an opinion of counsel is obtained which states that such contract is enforceable in the state in which the broker/dealer and sales representative or unaffiliated selling member reside;
      (c) the broker/dealer's liability for the commission payable is limited solely to the proceeds of the concession receivable; and,
      (d) the entire amount of the commission payable is included in aggregate indebtedness at the time of the accrual.

      Based on the experience gained from the application of the above interpretation and as a result of discussions with the Association's staff, the Division of Market Regulation has reconsidered the above provisions and found it appropriate to modify items (b) and (d) as follows:

      • with respect to the requirement of an opinion of counsel there was some question as to whether a contract that obligates the broker-dealer to pay a commission to a sales representative only upon the broker-dealer's receipt of the concession may be void or voidable under various state laws. Counsels' opinions have been rendered on the validity of these agreements under the laws of most if not all states. To date, no agreement has been found invalid because of applicable state laws and consequently, the opinion of counsel may not generally be necessary. Rather, the Designated Examining Authority may now impose the requirement in those instances where it is deemed appropriate.
      • the inclusion of the entire liability for commissions payable in aggregate indebtedness may unnecessarily restrict the ability of a broker-dealer to expand its business, particularly if a substantial amount of the commissions are payable years after the net capital computation is prepared. Effective immediately, a broker-dealer should include in the calculation of aggregate indebtedness that portion of the liability which is payable within twelve months from the net capital computation date and in addition include in such calculation an amount equal to one percent of the remaining commission payable.

      Please note that while provisions (b) and (d) enumerated above have been modified, the requirements addressed under (a) and (c) with respect to the written contract and the limitation of the liability to proceeds of the concessions receivable remain intact.

      Questions concerning this notice may be directed either to I. William Fishkind, Assistant Director, Surveillance Department at (202) 728-8405 or your local District office.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

    • 84-47 Adoption of Amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice

      TO: All NASD Members and Other Interested Persons

      The Securities and Exchange Commission has recently approved amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice that relates to minimum margin requirements for option contracts on a market or industry index. These amendments which became effective on April 13, 1984 establish minimum margin requirements for stock index options that are listed or traded on a registered national securities exchange, or displayed in the NASDAQ System, and extends these requirements to members for whom the Association is the designated examining authority who deal in index options on an access basis.

      The text of the rule change, a copy of which is attached hereto, should be closely reviewed for a complete understanding of present margin requirements. Any questions concerning this notice may be directed to I. William Fishkind, Assistant Director, Surveillance Department at (202) 728-8405 or your local District Office.

      Sincerely,

      John E. Pinto, Jr.
      Senior Vice President
      Compliance

      Attachment

      1. Text of Rule Change

      The following is the full text of the amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice.

      Sections 1 through 4(a)(4)(iii) unchanged.

      Sec. 4.

      Minimum Margin-Option Contracts on a Market Index

      (iv) in the case of puts and calls listed or traded on a registered national securities exchange or displayed in the NASDAQ System and representing options on a market index carried in a short position in an account, 100% of the current market value of the option contract plus 10% of the product of the current index value and the index multiplier applicable to the option contract. In each case, the amount shall be decreased by any excess of the aggregate exercise price of the option over the product of the current index group value and the applicable index multiplier in the case of a call, or any excess of the product of the current index value and the applicable index multiplier over the aggregate exercise price of the option in the case of a put; provided, however, that the minimum margin required on each such option contract shall not be less than 100% of the current market value of the option contract plus 2% of the product of the current index group value, and the applicable index multiplier;

      Option Contracts on an Industry Index

      (v) for each put or call option contract on an industry index carried in a short position in the account, margin must be deposited and maintained equal to at least 30% of the product of the current index value times the index multiplier, increased by any unrealized loss or reduced by any excess of the aggregate exercise price of the option over the product of the current index value times the index multiplier in the case of a call, or any excess of the product of the current index value times the index multiplier over the aggregate exercise price of the option in the case of a put; provided, however, that the margin shall not be less than $250 per option contract.
      The requirements set forth in paragraphs (iv) and (v) hereof are subject to the following exceptions, which in each case may be applied at the discretion of the member organization with which the account is maintained.
      (1) In the case of long call index options (or long put index options) which are offset by positions in short call index options (or short put index options) for the same underlying index with the same index multiplier, provided that the expiration date of the long calls (or long puts) is the same as or subsequent to the expiration date of the offsetting short calls (or short puts), the treatment shall be as follows:
      (A) When the exercise price of the long call index option (or short put index option) is less than or equal to the exercise price of the offsetting short call index option (or long put index option), no margin is required.
      (B) When the exercise price of the long call index option (or short put index option) is greater than the exercise price of the offsetting short call index option (or long put index option) margin is required equal to the difference in aggregate exercise prices.
      (2) In the case of accounts carrying positions in short put index options which are offset by positions in short call index options for the same underlying index with the same index multiplier, the margin required shall be the margin required for the short put option contract or the margin required for the short call option contract (pursuant to subparagraphs (iv) and (v) of this Rule), whichever is greater, as determined by (iv) and (v) above, increased by the amount of any unrealized loss on the other option contract.

    • 84-46 SEC Approval of Revised Rules for Bunching of NASDAQ/NMS Trades

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      The Securities and Exchange Commission has approved amendments to Schedule D of the Association's By-Laws with respect to the rules which permit the aggregation or "bunching" of orders in NASDAQ National Market System securities into a single transaction report.

      Under the amendments, which are effective immediately, orders of less than 10,000 shares which are either received or initiated by the trading departments of member firms and executed at the same price may be bunched into a single transaction report. The amendments therefore extend bunching to principal trades by members and increase the size of individual orders which may be bunched in a single transaction report from 5,000 to less than 10,000 shares.

      All other aspects of the bunching rule contained in Section 2(f), Part XIV of Schedule D are unchanged. As a reminder to members in this regard the rule still states that:

      • It is not permissible for a member to withhold reporting a trade in anticipation of bunching the transaction with other transactions;
      • Bunching can only occur if all bunched transactions are executed within 60 seconds of the first trade bunched;
      • Each bunched trade report must be made within 90 seconds of the first trade executed;
      • The reporting member must identify each bunched trade report by appending a ".B" to the trade report; and,
      • All order tickets of bunched trades must be identifiable by the member.

      The new bunching amendments were first proposed by the NASD's Trading Committee and were adopted earlier this year by the Association's Board of Governors. The rule change received considerable support from the National Security Traders Association (NSTA) both before and during the period of formal consideration by the SEC. The NASD and NSTA believe substantial benefits to members and investors will result from the amended bunching rule. These include an increase in the accuracy and promptness of trade reports; a reduction of late transaction reports; and, a lessening of the administrative burdens on member firms since less equipment and personnel will be required by members to fulfill their transaction reporting responsibilities.

      In order to assist members' understanding of the amendments, the text of the rule change together with examples of how the new bunching rules will operate are attached to this Notice.

      Questions regarding the new rule and this Notice should be directed to the undersigned at (202) 728-8050.

      Sincerely,

      S. William Broka
      Vice President
      NASDAQ Operations

      Attachment

      NASD BY-LAWS SCHEDULE D, PART XIV, SECTION 2(f)

      (f) Aggregation of Transaction Reports

      (1) Under the following conditions, individual executions of orders in a security at the same price may be aggregated, for transaction reporting purposes, into a single transaction report.

      (A) Orders received prior to the opening of the reporting member's market in the security and simultaneously executed at the opening. Also, orders received during a trading or quotation halt in the security and executed simultaneously when trading or quotations resume. In no event shall a member delay its opening or resumption of quotations for the purpose of aggregating transactions.

      Example:

      A firm receives, prior to its market opening, several market orders to sell which total 10,000 shares. All such orders are simultaneously executed at the opening at a reported price of 40. REPORT 10,000 shares at 40.

      (B) Simultaneous executions by the member of customer transactions at the same price, e.g., a number of limit orders being executed at the same time when a limit price has been reached.

      Example:

      A firm has several customer limit orders to sell which total 10,000 shares at a limit price of 40. That price is reached and all such orders are executed simultaneously. REPORT 10,000 shares at 40.

      (C) Orders relayed to the trading department of the reporting member for simultaneous execution at the same price.

      Example:

      A firm purchases a block of 50,000 shares from an institution at a reported price of 40. REPORT 50,000 at 40.
      Subsequently, one of the firm's branch offices transmits to the firm's trading department for execution customer buy orders in the security totalling 12,500 shares at a reported price of 40. REPORT 12,500 at 40.
      Subsequently, another branch office transmits to the firm's trading department for execution customer buy orders totalling 15,000 shares in the security at a reported price of 40. REPORT 15,000 at 40.

      Example:

      Due to a major change in market conditions, a firm's trading department receives from a branch office for execution customer market orders to sell totalling 10,000 shares. All are executed at a reported price of 40. REPORT 10,000 at 40.

      (D) Orders received or initiated by the reporting member which are impractical to report individually and are executed at the same price within 60 seconds of execution of the initial transaction; provided however, that no individual order of 10,000 shares or more may be aggregated in a transaction report and that the aggregated transaction report shall be made within 90 seconds of the initial execution reported therein. Furthermore, it is not permissible for a member to withhold reporting a trade in anticipation of aggregating the transaction with other transactions.

      Examples:

      A reporting member receives and executes the following orders at the following times and desires to aggregate reports to the maximum extent permitted under this rule.

      First Example

       

      11:01:00

      500 shares at 40

      11:01:05

      500 shares at 40

      11:01:10

      9,000 shares at 40

      11:01:15

      500 shares at 40

      REPORT:

      10,500 shares at 40 within ninety seconds of 11:01.

      Second Example

       

      11:01:00

      100 shares at 40

      11:01:10

      11,000 shares at 40

      11:01:30

      300 shares at 40

      REPORT:

      400 shares within ninety seconds of 11:01 and 11,000 shares within ninety seconds of 11:01:10 (individual transactions of 10,000 shares or more must be reported separately).

      Third Example

       

      11:01:00

      100 shares at 40

      11:01:15

      500 shares at 40

      11:01:30

      200 shares at 40

      11:02:30

      400 shares at 40

      REPORT:

      800 shares at 40 within ninety seconds of 11:01 and 400 shares at 40 within ninety seconds of 11:02:30 (the last trade is not within sixty seconds of the first and must, therefore, be reported separately).

      (2) The reporting member shall identify aggregated transaction reports and order tickets of aggregated trades in a manner directed by the Corporation.

    • 84-45 Request for Comments on a Proposed New Section to the Uniform Practice Code Concerning Customer Account Transfers

      IMPORTANT

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members and Other Interested Persons

      COMMENTS MUST BE RECEIVED BY OCTOBER 1, 1984

      The National Association of Securities Dealers, Inc. (the "Association" or "NASD") is publishing for comment a proposed new Section 65 to the Association's Uniform Practice Code which would establish procedures for customer account transfers between member firms. Comments on the proposed new section are invited from members and other interested persons. After the comment period has expired, the Association's Uniform Practice Committee and the Board of Governors will review the proposal taking into consideration the comments received. The proposal will thereafter be filed with the Securities and Exchange Commission for approval. The text of proposed new Section 65 is attached to this notice. A discussion of the background and explanation of the rule appear below.

      BACKGROUND AND EXPLANATION OF NEW SECTION 65

      In September 1982, the New York Stock Exchange proposed amendments to NYSE Rule 412, Customer Account Transfer Contract. The amendments were recommended to the Exchange by the Ad Hoc Rule 412 Industry Committee which consisted of individuals responsible for processing transfers of customer accounts at member firms and representatives from the various regulatory agencies. The purpose of the amendments was to strengthen existing Rule 412 by specifying the procedures to be used in transferring customer accounts, by establishing a specified timeframe for completing the transfer and by requiring that fails to receive/deliver be established at the end of that period. Additionally, the amendments provided a procedure for processing the transfer of financial service accounts which support checking account and/or credit card privileges.

      The Association's Uniform Practice Committee reviewed the proposed Rule 412 amendments and in November 1982, the NASD sent a comment letter to the Exchange generally supporting the proposal. The proposed amendments to NYSE Rule 412 have not as yet been declared effective.

      Also, on the basis of its review of the NYSE proposal, the Uniform Practice Committee recommended to the NASD Board that the Association adopt a comparison rule comparable to the proposed NYSE Rule 412 to cover the more than 4,000 NASD members that do not belong to the Exchange. In formulating its proposal, the Committee determined to parallel closely the New York Stock Exchange's proposal to promote uniform industry standards and to minimize conflicts wherever possible.

      The following is a brief description of major provisions of proposed new Uniform Practice Code Section 65.

      • Paragraph (b) would require the carrying broker, upon receipt of transfer instructions to validate or reject said instructions within five (5) business days of receipt. Further, Section 65 would require the actual transfer of all security and money balances to take place within ten (10) business days after validation, with no subsequent extension of time. If the transfer of the account(s) has not been accomplished by the tenth business day, both members would be required to establish fail contracts at current market value.
      • Paragraph (d) would give the Association the authority to exempt from the provisions of this rule any member where special circumstances exist.
      • Paragraph (f) would allow the carrying member, where Financial Service Account(s) which support check writing privileges and/or charge card(s) are involved, to delay the account transfer until such checks and/or cards are returned or destroyed.
      • Paragraph (g) would provide that if one or both of the members involved in an account transfer is not a member of a registered clearing agency, fails must be established on an "ex-clearing house" basis.

      Proposed Section 65 closely parallels the proposed amendments to NYSE Rule 412 with one exception. In subsection (b), ten (10) business days are provided for completion of the transfer of security or money balances with no extension of time permitted (the NYSE proposal would allow an additional five (5) days via an extension of time.)

      COMMENT PROCEDURE

      All comments relating to proposed Section 65 should be sent to James M. Cangiano, Secretary, NASD, 1735 K Street, N.W., Washington, D.C. 20006, and received by October 1, 1984. Any questions concerning this notice should be directed to Donald Catapano, Uniform Practice Department, at (212) 839-6255.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      PROPOSED NEW SECTION TO THE UNIFORM PRACTICE CODE

      Customer Account Transfer Contracts

      SECTION 65

      (a) When a customer whose securities account(s) are carried by a member (the "carrying member") wishes to transfer the entire account(s) to another member (the "receiving member") and gives written notice of that fact to the receiving member, both members must expedite the transfer.
      (b) Upon receipt from the customer of a signed broker-to-broker transfer instruction to receive such customer's securities account(s) from the carrying member, the receiving member must immediately submit such instruction to the carrying member. The carrying member must, within five (5) business days following receipt of such instruction (1) validate and return the transfer instruction to the receiving member (adjusted if necessary to reflect the carrying member's record) or (2) take exception to the transfer instruction for reasons other than securities positions or money balance differences and advise the receiving member of the exception taken.
      Within ten (10) business days following the validation of a transfer instruction, the carrying member must complete the transfer of the account(s) to the receiving member. At the termination of the ten (10) business day period, the receiving member and the carrying member must immediately establish fail-to-receive and fail-to-deliver contracts at then current market values upon their respective books of account against the long security positions in the customer's account(s) and the receiving member must charge the related money amount (after properly considering the debit or credit balance in the customer's account(s) to the carrying member through a registered clearing agency. Simultaneously, short security positions in the customer's account(s), including options, must be delivered by the receiving member to the carrying member and the customer's account(s) shall thereupon be deemed transferred.
      (c) Both the receiving and the carrying members must coordinate activities with respect to the transfer of the customer's account(s) in order to avoid any loss to the customer during the transfer process, including any loss resulting from an improper trade, a failure to execute open orders, or from dividends of cash and securities, and other similar distributions (rights, warrants, stock splits, etc.), interest payments, bond or preferred stock calls for redemption or tender offers affecting the customer's account(s) and to which the customer is entitled.
      (d) The Association may exempt from the provisions of this rule, either unconditionally or on specified terms and conditions, any member if the Association determines that such exemption is consistent with the public interest, the protection of investors or the maintenance of fair and orderly markets.
      (e) For the purposes of this rule, the term "securities account(s)" shall be deemed to include any and all of the account's(s') money market fund positions or the redemption value thereof.
      (f) Where the account being transferred is a Financial Service Account (an account that supports check writing privileges and/or charge card(s)) it is recognized that the carrying member may be unable to validate the transfer instruction until the customer has returned or destroyed the charge card(s) and all unused checks. When a receipt signed by the carrying member attesting to the return of the charge card(s) and all unused cheeks or a notarized affidavit signed by the customer attesting to the loss or destruction of the charge card(s) and all unused checks is attached to the original transfer of account instruction, the carrying member must validate or take exception within the five (5) business day period as specified in paragraph (b) herein. The provisions of paragraph (b) relating to the procedures to be followed commencing upon such validation, shall then be fully applicable to the carrying member.
      (g) If one or both of the members processing a customer account transfer pursuant to this Section is not a member of a registered clearing agency, the fail-to-receive and fail-to-deliver contracts required to be established in paragraph (b), must be established outside a clearing corporation on an "ex-clearing house" basis. Similarly, settlement of the fail contracts and any close-out executions must be made "ex-clearing house."

    • 84-44 Amendments to the Uniform Practice Code Sections 5, 9, 12 and 30

      TO: All NASD Members

      ATTN: Operations Principals, Cashiers, and P&S Dept.

      The Securities and Exchange Commission has approved amendments to Sections 5, 9, 12 and 30 of the Uniform Practice Code. The Code prescribes the manner in which over-the-counter securities transactions other than those cleared through a registered clearing agency are compared, cleared and settled between NASD member firms. These amendments apply to all NASD members.

      BACKGROUND AND EXPLANATION OF AMENDMENTS

      The amendments to the Uniform Practice Code are designed to revise, clarify and adjust certain sections of the Code to reflect current market practices. These specific revisions were brought about at the suggestion of the Subcommittee on Unit Investment Trust Securities. The Subcommittee, while in the process of making recommendations for amending the Code to permit UITS to be covered, earmarked certain sections of the Code which were in need of revision.

      The following is a brief description of the Uniform Practice Committee's recommended amendments to the Code.

      • Section 5(b)(3) of the Code which relates to ex-dividend dates for investment company shares is deleted since such shares are no longer covered by the Code. It was believed that the recent addition of Section l(a)(iv) specifically excluding investment company shares other than those in Unit Investment Trusts made the retention of Section 5(b)(3) inappropriate.
      • Section 9 relating to comparisons or confirmations and "Don't Know" Notices has been amended by the addition of a new Section 9(d) which, in addition to the normal DK notice procedure contained in Section 9(c) allows sending a DK notice by any means of transmission which will provide for verification of delivery and receipt of the notice. This provision was adopted to allow the use of modern telecommunications capacities of many member firms which enable them to more efficiently transmit notices by means other than registered or certified mail as contemplated by Section 9(c). Additionally, the 15 calendar day time period contained in Section 9(c)(l) was deleted since the DK notice procedure is voluntary in nature and therefore such a restriction serves no valid purpose.
      • Section 12 dealing with time and place of delivery has been amended to allow the parties involved in a transaction to utilize delivery instructions other than those provided for under the rule, such as delivery to a different location, if the alternate instructions are provided by the purchaser at the time of the transaction.
      • Section 30 dealing with witnesses to assignments has been deleted since the procedure is not required under the rules of the Stock Transfer Association and has not been in common use for many years.

      The text of these amendments to the Association's Uniform Practice Code is attached. Questions regarding these amendments may be directed to Donald J. Catapano, Uniform Practice Department at (212) 839-6255.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachment

      AMENDMENTS TO THE UNIFORM PRACTICE CODE

      Sections 5, 9,12 and 30

      (New language is underlined, deletions are indicated by brackets)

      Transactions in Securities "Ex-Dividend," "Ex-Rights" or "Ex-Warrants"

      Sec. 5(b).

      [Ex-dividend dates for investment company shares

      (3) Notwithstanding the above, the ex-dividend date on securities of an open-end management investment company shall be the date designated by the issuer or its principal underwriter. ]

      Comparisons or Confirmations and "Don't Know Notices"

      Sec. 9.

      Sent By Each Party

      (a) (no change)
      Uniform Comparison or Confirmation
      (b) (no change)
      "DK" Procedures Using "Don't Know Notices" (NASD Form No. 101)
      (c) When party to a transaction sends a comparison or confirmation [ or comparison] of a trade, but does not receive a comparison or confirmation [or comparison] or a signed DK, from the contra- [broker ] member by the close of four business days following the trade date of the transaction, the following procedure may be utilized:
      (1) [ Not later than the fifteenth calendar day following the trade date] The confirming member shall send by certified mail, return receipt requested, or messenger, a "Don't Know Notice" on the form prescribed by the Association to the contra- [ broker ] member in accordance with the directions contained thereon. If the notice is sent by certified mail the returned, signed receipt therefor must be retained by the confirming member and attached to the fourth copy of the "Don't Know Notice." If delivered by messenger, the fourth copy must immediately be dated and manually receipted by, and imprinted with the firm stamp of, the contra-[broker] member pursuant to the provisions of paragraph (c) (4) [hereof] of this section, returned to the messenger and thereafter be retained by the confirming member.
      (2)
      [ (a) ]
      (A) After receipt of the "Don't Know Notice" as specified in [section (1) hereof] paragraph (c)(l) of this section, the contra- [ broker ] member shall have four business days after the notice is received to either confirm or DK the transaction by mail or messenger in accordance with the provisions of [ subparagraphs (b) or (c) and subsection (4) hereof], paragraphs (c)(2)(B) or (C) of this section.
      [ (b) ]
      (B) If the contra-[broker ] member desires to respond by mail, the second copy of the "Don't Know Notice" previously received shall be executed in accordance with the provisions of [subsection (4) hereof] paragraph (c)(4) of this section and sent to the confirming broker by certified mail, return receipt requested. The notice so returned shall indicate clearly whether the contra-[ broker ] member desires to confirm or DK the transaction. The returned, signed receipt must thereafter be retained by the contra-[broker] member.
      [ (c) ]
      (C) If the contra- broker member desires to respond by messenger, [he] it^ shall return to the confirming broker member the second and third copies of the notice which shall indicate clearly whether the contra-[ broker ] member desires to confirm or DK the transaction. The third copy shall be dated and manually receipted by the confirming [broker] member pursuant to the provisions of [subsection (4) hereof ] paragraph (c)(4) of this section and immediately be returned to the messenger and thereafter be retained by the contra-[broker ] member.
      (3) If the confirming member does not receive a response from the contra- [ broker ] member by the close of four business days after receipt by the confirming member of either the fourth copy of the "Don't Know Notice" [ as specified in subsection (1) ] if delivered by messenger, or the post office receipt if delivered by mail, as specified in paragraph (c)(l) of this section, such shall constitute a DK and the confirming member shall have no further liability for the trade.
      (4) All "Don't Know Notices" sent by any party pursuant to the provisions of this section 9 [(b) ] (c) must be manually signed by a person authorized to pursue further discussions in respect to the transaction on behalf of the signing member. In addition to the manual signature receipt on the third and fourth copies, as required by paragraphs [ (b)] (c)(l) and [(b)(2)(c)] (c)(2)(C) hereof, if delivered by hand, the firm stamp of the contra-[ broker] member must be imprinted thereon to signify receipt.
      (5) (no change)
      "DK" Procedure Using Other Forms of Notice
      (d) When a party to a transaction sends comparison or confirmation of a trade, but does not receive a comparison or confirmation or a signed DK, from the contra-member by the close of four business days following the date of the transaction, the following procedure may be utilized in place of that provided in the preceding paragraph (c).
      (1) The confirming member shall provide notice to the contra-member Identifying the trade in question by providing the information described in Section 10 of this Code. The notice shall, in addition, contain a request for the contra-member to confirm or "DK" the trade and the name of the individual issuing the notice.
      (2) The confirming member shall record and retain verification of delivery to the contra-member of each notice issued in accordance with paragraph (d)(l) of this section T
      (3) The contra-member, on receipt of the notice from the confirming member, shall research the trade in question.
      (4) The contra-member shall then send notice to the confirming member to either confirm or "DK" the trade and shall include the name of the individual issuing the notice.
      (5) If the confirming member does not receive a response in the form of a notice from the contra-member by the close of four business days after receipt of the confirming member's notice, such shall constitute a DK and the confirming member shall have no further liability.
      (6) Both the confirming member and the contra-member shall record and retain verification of the delivery and receipt of each notice issued" pursuant to paragraph (d)(4) of this section T
      (7) If the trade in question is confirmed by the contra-member pursuant to paragraph (d)(4) of this section, settlement shall be completed in the normal manner.
      (8) Notices under this paragraph (d) may be delivered through any communications medium which provides verification of delivery and receipt as required under paragraphs (d)(2) and (d)(6).

      Delivery of Securities Time and Place of Delivery

      Sec. 12. Delivery shall be made at the office of the purchaser between the hours established by rule or practice in the community where such office is located. If the purchaser maintains more than one office, delivery shall be made at the office with which the transaction was effected, unless delivery instructions are provided at the time of the transaction.

      Witnesses to Assignments

      [See. 30. Each signature to an assignment or power of substitution shall be witnessed by an individual and dated. Where there are two or more signatures to an assignment, the witness shall state definitely, in his own handwriting, to which signature he was witness. A certificate with either the assignment or power of substitution witnessed by a person since deceased is not a good delivery. ]

    • 84-43 NASDAQ Market Open on Election Day, November 6, 1984

      TO: All NASD Members

      The NASDAQ market will be open on Election Day, Tuesday, November 6, 1984, marking the first time in NASDAQ's 13-year history that it has been open for trading on Presidential Election Day.

      In addition, all NASD offices will be staffed on that date and will follow normal operating hours.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-42 Labor Day: Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, September 3, 1984, in observance of Labor Day. "Regular-Way" transactions made on the business days immediately preceding that day will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      *Regulation T Date

      August 24

      August 31

      September 5

      27

      September 4

      6

      28

      5

      7

      29

      6

      10

      30

      7

      11

      31

      10

      12

      September 3

      Markets Closed

      4

      11

      13

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rule making Board Rule G-12 on Uniform Practice. Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date members must take such action is shown in the column entitled "Regulation T Date."


    • 84-41 40 More Securities to Join NMS on August 14

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      With the 40 issues joining NASDAQ's National Market System on Tuesday, August 14, there will be over 1,053 issues trading under real-time trading reporting. These 40 issues meet the SEC's voluntary designation criteria.

      The securities scheduled to join NMS on Tuesday, August 14, are:

      SYMBOL

      COMPANY

      LOCATION

      ACHV

      Archive Corporation

      Costa Mesa, CA

      CMLI

      CML Group, Inc.

      Acton, MA

      CRMK

      Cermetek Microelectronics, Inc.

      Sunnyvale, CA

      CHPN

      Chapman Energy, Inc.

      Dallas, TX

      CHER

      Cherry Electrical Products Corporation

      Waukegan, IL

      CFIB

      Consolidated Fibres, Inc.

      San Francisco, CA

      CBRL

      Cracker Barrel Old Country Store,Inc.

      Lebanon, TN

      DDSC

      Delta Data Systems Corporation

      Trevose, PA

      ECILF

      Electronics Corporation of Israel Ltd.

      Tel Aviv, Israel

      FBRX

      Fibronics International, Inc.

      Hyannis, MA

      GTCH

      GTECH Corporation

      Providence, RI

      GIGA

      Giga-Tronics Incorporated

      Pleasant Hill, CA

      HNAT

      Hartford National Corporation

      Hartford, CT

      HATH

      Hathaway Corporation

      Denver, CO

      HWKB

      Hawkeye Bancorporation

      Des Moines, IA

      HDON

      Henredon Furniture Industries, Inc.

      Morganton, NC

      HIBCA

      Hibernia Corporation (Cl A)

      New Orleans, LA

      IFSIA

      Interface Flooring Systems, Inc. (Cl A)

      LaGrange, GA

      JUNO

      Juno Lighting Inc.

      Des Plaines, IL

      KDON

      Kaydon Corporation

      Muskegon, MI

      MRGX

      Margaux Controls, Inc.

      San Jose, CA

      MASX

      Masco Industries, Inc.

      Taylor, MI

      MAXI

      Maxicare Health Plans, Inc.

      Hawthorne, CA

      MRBK

      Mercantile Bankshares Corporation

      Baltimore, MD

      MPAI

      Mid Pacific Airlines, Inc.

      Honolulu, HI

      NEBS

      New England Business Service, Inc.

      Groton, MA

      PLMX

      PLM Financial Services, Inc.

      San Francisco, CA

      PFFS

      Pacific First Federal Savings Bank

      Tacoma, WA

      PAYX

      Paychex, Inc.

      Rochester, NY

      PCPI

      Personal Computer Products, Inc.

      San Diego, CA

      RSTY

      Rusty Pelican Restaurants, Inc.

      Irvine, CA

      SSSN

      Satelite Syndicated Systems, Inc.

      Tulsa, OK

      SHOP

      Shopsmith, Inc.

      Dayton, OH

      SBOS

      South Boston Savings Bank

      South Boston, MA

      SPTR

      Spec Tran Corporation

      Sturbridge, MA

      SPER

      Sperti Drug Products, Inc.

      Erlanger, KY

      STFL

      Stifel Financial Corporation

      St. Louis, MO

      TELC

      Telco Systems, Inc.

      Menlo Park, CA

      UTBC

      Union Trust Bancorp

      Baltimore, MD

      ZION

      Zions Utah Bancorporation

      Salt Lake City, UT

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trading reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-40 Compensation Arrangements with respect to Sale of Mutual Fund Shares

      TO: All NASD Members

      The Association has been, receiving an increased number of inquiries regarding the application of Article III, Section 26 of the Rules of Fair Practice to certain compensation arrangements, and proposed arrangements, between principal underwriters and dealers in open-end management investment company shares (mutual funds) and unit investment trusts. These inquiries are primarily related to subsection (k) of the rule (the Anti-Reciprocal Rule) and subsection (1) of the rule, which addresses dealer concessions and other forms of compensation.

      The Anti-Reciprocal Rule

      Subsection (k) of Section 26 prohibits members from favoring or disfavoring the distribution of shares of any particular investment company or group of investment companies on the basis of brokerage commissions received or expected by such member from any source. As outlined below, there are a number of additional specific prohibitions contained in the rule.

      As originally adopted in 1973, the Anti-Reciprocal Rule prohibited members from seeking orders for the execution of portfolio transactions on the basis of their sales of investment company shares. Principal underwriter members were similarly prohibited from participating or influencing the investment company to consider sales of investment company shares as a qualifying or disqualifying factor in the selection of a broker-dealer to execute portfolio transactions.

      The rule was amended in 1981 to specify that subject to certain restrictions it does not prohibit members from seeking or granting brokerage commissions in connections with the sale of investment company shares, and that it does not prohibit members from selling shares of investment companies which follow a disclosed policy of considering sales of their shares as a factor in the selection of broker-dealers to execute portfolio transactions, subject to best execution.

      It appears from the nature of the inquiries recently received that some members may view the 1981 amendments as having altered the specific standards of the rule more extensively than was actually the case. Members should understand that the rule still prohibits:

      (1) demands or solicitation of promises of brokerage commissions by dealers as a condition to the sale of fund shares;
      (2) offers or promises of brokerage commissions by principal underwriters as a condition to the sale of fund shares or the requesting or arranging for the direction of a specific amount or percentage of brokerage commissions conditioned upon sales or promises of sales of fund shares;
      (3) the suggesting, encouraging or sponsoring of any dealer's incentive or sales contest by a principal underwriter, which incentive is known to be based upon, or financed by, port folio brokerage commissions;
      (4) the providing of any kind of special compensation or incentive to sales personnel for the sale of shares of specific investment companies based upon portfolio brokerage com missions received or expected. This prohibition includes contests, bonuses, preferred lists, or commission credits; and,
      (5) allowing registered representatives, branch managers, or other sales personnel to share in portfolio brokerage commissions received by the member from an investment company whose shares are sold by the member, if such commissions are directed by or identified with, the investment company. This includes directly assigning the individual to handle the accounts or the transaction, as well as indirect methods of accomplishing such participation.

      The following examples represent a condensation of specific situations recently reviewed by the Association's Investment Companies Committee, which situations are inconsistent with the rule:

      • a request by a dealer, or an offer or agreement by a principal underwriter, for a specified percentage of portfolio brokerage commissions relative to the dealer's sale of fund shares;
      • a request by a dealer, or an offer or agreement by a principal underwriter, that portfolio business be placed to finance all or part of the dealer's sales contest;
      • a request by a dealer, or the offer by a principal under writer, that portfolio brokerage commissions be placed as a condition to signing a sales agreement;
      • a request by a registered representative, or an offer or agreement by a principal underwriter, that portfolio orders be placed in recognition of the representative's prior or future sales of fund shares; and,
      • a request by a dealer, or the offer or agreement by a principal underwriter, that portfolio brokerage commissions be placed on the understanding that this would result in placement of the funds on the dealer's preferred list.

      On a separate point, concern has been expressed that the language of the Anti-Reciprocal Rule could connote the Association's intention to prohibit the allocation of brokerage transactions of investment companies other than the specific investment company whose shares are sold by the broker-dealer. This issue relates to the broad question of the degree to which investment companies under common management may be viewed as a group, rather than considering each company as independent. In this respect, the language of the Anti-Reciprocal Rule should not be construed as a statement of views on this broader issue nor as interpreting the provisions of the Investment Company Act of 1940 or any other statute.

      Similarly, a number of questions have been raised which relate to a broker-dealer's qualifications to execute institutional transactions. It should be understood that the Anti-Reciprocal Rule is premised on the principle of "best execution" but it does not purport to define the term or to specify the essential ingredients of an investment company's fiduciary obligations in this respect. Therefore, except as they relate to requirements for qualification examinations, net capital, recordkeeping, or similar questions involving a broker-dealer's status to execute transactions, the Association does not intend to respond to inquiries which seek to define the circumstances under which a broker-dealer is "qualified" to execute, or participate in, institutional securities transactions.

      Dealer Concessions

      Subsection (1) of Section 26 addresses requirements with respect to the payment of dealer concessions and other compensation (including distribution fees paid pursuant to SEC Rule 12b-l under the Investment Company Act of 1940). This rule was also amended in 1981 to allow, among other things, non-uniform dealer concessions which are specifically disclosed in a fund's prospectus, and non-cash concessions or compensation if the dealer is given an option to receive the cash equivalent value of a non-cash concession. The rule also specifies certain items which will not be considered to be of material value and therefore are not dealer concessions which must be disclosed in the fund's prospectus.

      Recent inquiries with respect to the dealer concession aspect of the rule also reflect that some members may not clearly understand certain of its basic principles.

      First, no dealer concessions may be paid to individual registered representatives of another member. Dealer concessions, by definition, represent compensation earned by, and paid to, a dealer. Payments to another member's representatives may also raise questions with respect to the need to register those representatives directly with the paying member.

      Secondly, those items specified in the rule as not constituting items of material value are presumed to be unconditional and not tied to any past or future sales quotas. A gift, for example, is assumed to be just that: an unconditional token remembrance. If a "gift" must be earned by sales of fund shares, it is a dealer concession which must be disclosed in the fund's prospectus and may not be paid to an individual representative of another member even if disclosed.

      On another point, non-cash concessions earned by a dealer must be confirmed by the principal underwriter, and such concessions are subject to NASD assessments on gross income, irrespective of whether the receiving member chooses to award such non-cash concessions to individual representatives, and irrespective of whether such representatives are "independent contractors."

      Examples of inquiries recently received by the Association's Investment Companies Committee, which examples are considered to be inconsistent with Section 26(1), are as follows:

      • payment by a principal underwriter to a dealer to offset expenses incurred in "due diligence" or in training registered representatives;
      • payment by a principal underwriter of a special concession to a dealer holding a sales contest, without prospectus disclosure of the terms of the arrangement and the identity of the dealer;
      • reimbursement by a principal underwriter of a dealer's "start-up costs";
      • the financing or expense reimbursement by a principal underwriter of a dealer's sales contest expense without specific prospectus disclosure;
      • the exclusion of the funds of a principal underwriter from qualification for a dealer's sales contest unless the under writer pays for some portion of the contest prizes; and,
      • a "business meeting" held by a mutual fund principal under writer, at a resort hotel, for dealer representatives meeting specified sales quotas.

      The foregoing examples of conduct inconsistent with Section 26 are not all-inclusive. Members are urged to familiarize all personnel with the requirements and prohibitions of this rule. Formal disciplinary actions in this area have been taken, others are under consideration, and District Business Conduct Committees have been requested to pay particular attention to this area in the future.

      Questions regarding this notice should be directed to Robert L. Butler at 1735 K Street, N.W., Washington, D.C. 20006. Telephone: (202) 728-8329.

      Very truly yours

      Gordon S. Macklin
      President

    • 84-39 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the second quarter of 1984. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006.

      Notice Number

      Date

      Topic

      84-21

      April 3, 1984

      Adoption of a New Rule of Fair Practice and Other Amendments Regulating Activities of Members Experiencing Financial or Operational Difficulties

      84-22

      April 12, 1984

      Ten Securities Mandated to Join NMS on May 8, 1984

      84-23

      April 27, 1984

      National Market System Grows to 935 Securities with 50 Additions on May 15

      84-24

      May 3, 1984

      Memorial Day Trade Date-Settlement Date Schedule

      84-25

      May 3, 1984

      Quarterly Checklist of Notices to Members

      84-26

      May 11, 1984

      Request for Comment on Proposed Criteria for NASDAQ NMS Designation

      84-27

      May 15, 1984

      SEC Request for Comments on NASDAQ Options Proposal

      84-28

      May 22, 1984

      Amendments to Appendix F Concerning Sales Incentives for Direct Participation Programs

      84-29

      May 29, 1984

      Forty-Six Securities Mandated to Join NMS on June 19, 1984

      84-30

      May 29, 1984

      Monthly Statistical Report Subscription Service

      84-31

      June 11, 1984

      SIPC Trustee Appointed for First Interwest Securities Corp., Denver, Colorado

      84-32

      June 11, 1984

      SIPC Trustee Appointed for June S. Jones Co., Portland, Oregon

      84-33

      June 13, 1984

      Independence Day Trade Date-Settlement Date Schedule

      84-34

      June 15, 1984

      Implementation of the NASAA/CRD Temporary Agent Transfer Program (TAT) Via the Central Registration Depository-Need to File Broker-Dealer Undertaking

      84-35

      June 28, 1984

      NMS Securities to Surpass 1,000 Mark on July 10, 1984

      * * *

    • 84-38 Five Securities Mandated to Join NMS August 7, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      An additional five securities will join the NASDAQ National Market System on Tuesday, August 7, 1984. These securities have met the NMS mandatory designation requirements as of the end of the second quarter and, as required by SEC Rule HAa2-l, automatically are added to the National Market System within 45 days of the quarter ending date.

      The five securities joining NMS on Tuesday, August 7, are:

      Symbol

      Company

      Location

      CAMP

      California Amplifier, Inc.

      Newbury Park, CA

      DFSL

      Dallas Federal Savings and Loan Association

      Dallas, TX

      DRAM

      Micron Technology, Inc.

      Boise, ID

      RTRSY

      Reuters Holdings PLC

      London, England

      VMXI

      VMX, Inc.

      Richardson, TX

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trading reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-37 Interpretation of Venture Capital Restrictions

      TO: All NASD Members and Other Interested Persons

      The National Association of Securities Dealers, Inc. ("Association" or "NASD") is publishing interpretations of restrictions which apply to venture capital investments by NASD members and certain of their control persons. 1/ These restrictions (hereinafter the "Venture Capital Restrictions") were added to the Interpretation of the Board of Governors — Review of Corporate Financing ("Corporate Financing Interpretation") under Article III, Section 1 of the NASD Rules of Fair Practice on May 31, 1983. 2/ The text of the Venture Capital Restrictions is as follows:

      No member or officer, director, general partner or controlling shareholder of a member which participates in the initial public offering of an issuer's securities and which beneficially owns any securities of said issuer at the time of filing of the offering shall sell those securities during the offering or sell, transfer, assign or hypothecate those securities for one year following the effective date of the offering. 3/

      A similar provision is contained in the proposed Corporate Financing Rule which, if approved by the Securities and Exchange Commission ("SEC" or "Commission"), will replace the Corporate Financing Interpretation. 4/

      Interpretations

      Shortly after adoption of the Venture Capital Restrictions, several interpretive questions arose regarding the applicability of the Restrictions in various fact situations. These questions have now been considered by the Association's Corporate Financing Committee ("Committee") and Board of Governors ("Board") in conjunction with discussions with the SEC staff and their views are described herein. The following interpretations do not exclude application of the Venture Capital Restrictions in other fact situations. In addition, it should be noted that these interpretations relate to the present language of the Venture Capital Restrictions and will not necessarily apply if the language is revised.

      Sister Subsidiaries — Numerous questions have arisen concerning the applicability of the Venture Capital Restrictions to "sister" subsidiaries of a broker/dealer, i.e., corporations or partnerships which are controlled by the entity which controls the broker /dealer. The Association has taken the position from the outset that the Restrictions apply to "downstream" subsidiaries of a broker/dealer, i.e., corporations or partnerships controlled by the broker /dealer, because profits realized on securities held by such subsidiaries are assumed to inure to the economic benefit of the broker/dealer. Securities owned by downstream subsidiaries are therefore viewed as beneficially owned by the broker/dealer.

      It has been less clear whether securities owned by sister subsidiaries should be viewed as beneficially owned by a broker/dealer. Some maintain that the conflict addressed by the Venture Capital Restrictions, the potential conflict of interest in setting price and performing due diligence, is present only when a participating broker/dealer or its officers, directors, or general partners stand to benefit from the contemplated public offering. Others maintain, however, that similar conflicts are present when a controlling shareholder of a participating broker/dealer stands to realize a benefit and that such a shareholder should be seen as benefiting from sales of securities held by a subsidiary it controls.

      On the basis of a review of the language and discussions with the SEC staff, the Association's Committee and Board have concluded that the Venture Capital Restriction should apply equally to securities which are beneficially owned by sister subsidiaries of broker/dealers and securities which are directly owned by such broker/dealers. A controlling shareholder realizes direct or indirect economic benefit from profits earned by the controlled entity and securities owned by a sister subsidiary of a broker/dealer will be viewed as beneficially owned by the controlling shareholder of the broker/dealer and therefore subject to the Venture Capital Restrictions.

      For purposes of determining whether an entity is a sister subsidiary, a downstream subsidiary, or a controlling shareholder, the Association will look to the definition of "affiliate" contained in Schedule E to Article IV, Section 2 of the NASD By-Laws. 5/ Under that definition, any corporation or partnership which controls, is controlled by, of is under common control with, a broker/dealer is an affiliate. The definition creates a presumption of control whenever one entity beneficially owns 10 percent or more of the outstanding voting securities of another.

      Immediate Family Members — The Venture Capital Restrictions apply to securities which are beneficially owned by an officer, director, general partner, or controlling shareholder of a broker/dealer participating in an initial public offering. The SEC staff has raised questions concerning the status of immediate family members of these persons, arguing that one could evade the Restrictions by placing securities in the name of a family member and in fact realize directly or indirectly the economic benefit of an unreasonably high public offering price. Others maintain that the concept of beneficial ownership is broad enough to encompass situations of this nature.

      In deference to the Commission staff, however, and in order to more specifically define the scope of beneficial ownership, the Association's Board and Committee have concluded that the Venture Capital Restrictions should apply to immediate family members of officers, directors, general partners, and controlling shareholders of a broker/dealer participating in an initial public offering.

      For purposes of the Venture Capital Restrictions, "immediate family" shall have the same meaning as in the Interpretation of the Board of Governors on Free-Riding and Withholding under Article III, Section 1 of the NASD Rules of Fair Practice. 6/

      Managed Accounts — Questions have arisen as to whether securities held in accounts managed by a broker/dealer should be viewed as beneficially owned by the broker/dealer for purposes of the Venture Capital Restrictions. The principal purpose of the Venture Capital Restrictions is to alleviate conflicts which could exist when a firm or individual setting the price of an initial public offering stands to profit from an unreasonably high price. That conflict is not present unless the firm or individual is entitled to receive profit realized upon sale of the securities.

      The Association's Board and Committee have concluded, therefore, that the Venture Capital Restrictions do not apply to securities held in managed accounts (including securities held in the name of a broker/dealer) so long as no participating broker/dealer or officer, director, general partner, or controlling shareholder of such a broker/dealer beneficially owns the securities. Where a portion of the securities in an account are beneficially owned by a restricted firm or person, that portion of the account's position is subject to the Venture Capital Restrictions. The Restrictions can be satisfied in such instances either by delivering securities in-kind to the restricted parties so as to remove restrictions on the remaining holdings, or by implementing procedures to assure that no restricted party receives any economic benefit from the sale of the unrestricted portion of the holdings.

      The Association is informed that it is not uncommon for certain types of investment partnerships to provide compensation to the account manager in the form of a participation in account profits after certain conditions are satisfied. For purposes of the Venture Capital Restrictions, the Association will not view such compensation arrangements as providing the account manager with a beneficial ownership interest in the account.

      Securities Issued By Broker/Dealers — A literal application of the Venture Capital Restrictions to distributions by a broker/dealer of its own securities might result in a finding that the broker/dealer could not sell such securities because it beneficially owned them at the time the offering was filed. This result was obviously not intended. While there is little dispute as to the application of the Restrictions to sales by a broker/dealer firm, questions have arisen concerning sales by officers, directors, general partners, or controlling shareholders of a broker/dealer when the broker/dealer issues securities. Some argue that application of the Restrictions is unduly onerous when an otherwise restricted person proposes to sell a relatively small portion of securities which he or she has owned for several years. The SEC staff has expressed some concern, however, about potential conflicts when an individual proposes to sell a large portion of recently acquired securities while actively participating in the pricing of a broker/dealer's new offering. The Association has been reviewing such situations on a case-by-case basis.

      * * * *

      We are hopeful that these interpretations will serve to clarify the application of the Venture Capital Restrictions. The Committee will continue to address further interpretive questions which arise.

      Sincerely,

      Gordon S. Macklin
      President


      1/ The Association is also publishing today proposed amendments to the restrictions on venture capital which, if adopted, would substantially alter those restrictions and, therefore, the interpretations contained herein. See NASD Notice to Members 84-36 (July 18, 1984).

      2/ See NASD Notice to Members 83-43 (Aug. 17, 1983).

      3/ NASD Manual (CCH) p. 2033. A discussion of the background of the Venture Capital Restrictions is included in NASD Notice to Members 83-43 (Aug. 17, 1983).

      4/ See NASD Notice to Members 83-24 (May 19, 1983); SEC File No. SR-NASD-83-27.

      5/ NASD Manual (CCH) p. 1101-3.

      6/ NASD Manual (CCH) p. 2045.


    • 84-36 Request for Comments on Possible Amendments to Venture Capital Restrictions

      To: All NASD Members and Other Interested Persons

      COMMENT PERIOD CLOSES ON: AUGUST 17, 1984

      The National Association of Securities Dealers, Inc. ("Association" or "NASD") is requesting comments on possible amendments to restrictions which apply to venture capital investments by NASD members and certain of their control persons. 1/ The proposed amendments, which are discussed in concept below, generally would liberalize the present restrictions.

      Present Requirements

      Currently, the Interpretation of the Board of Governors — Review of Corporate Financing ("Corporate Financing Interpretation") under Article III, Section 1 of the NASD Rules of Fair Practice states in part as follows:

      No member or officer, director, general partner or controlling shareholder of a member which participates in the initial public offering of an issuer's securities and which beneficially owns any securities of said issuer at the time of filing of the offering shall sell those securities during the offering or sell, transfer, assign or hypothecate those securities for one year following the effective date of the offering. 2/

      These restrictions (hereinafter the "Venture Capital Restrictions") were added to the Corporate Financing Interpretation on May 31, 1983. A similar provision is contained in the proposed Corporate Financing Rule which, if approved by the Securities and Exchange Commission ("SEC" or "Commission") will replace the Corporate Financing Interpretation. 3/

      One of the principal concerns leading to adoption of the Venture Capital Restrictions was the potential conflict of interest which may exist when a broker/dealer or its control persons set the public offering price and perform a due diligence investigation for an initial public offering at the same time the firm or persons are selling their own holdings in the company. In this situation, the economic incentive of the firm or persons may be contrary to the financial interests of public investors because, instead of seeking to identify and disclose any adverse information on the issuer and to establish a fair public offering price, the firm or persons arguably would have an incentive to set a high price and adhere to less stringent disclosure standards. The Venture Capital Restrictions, however, are not limited to firms and persons performing pricing and due diligence functions, but apply to any broker/dealer (and its control persons) which participate in any manner in an initial public offering. 4/ For example, a director of a broker/dealer which is acting only as a selling group member for a de_ minimis portion of an offering is prohibited from selling his holdings as part of the offering or for one year thereafter. Many have suggested that the current approach of the Venture Capital Restrictions is unduly broad and imposes an onerous burden on firms and persons who have no influence on the pricing or due diligence for an offering.

      The Association's Board of Governors ("Board") and Corporate Financing Committee ("Committee") have carefully considered the present scope of the Venture Capital Restrictions and have concluded that those provisions are unduly expansive and impose unnecessary burdens upon certain broker/dealers and persons without apparent commensurate public benefit. The Association is therefore requesting comments on several proposed amendments to the Restrictions which would narrow their application to situations in which a more specifically identifiable conflict exists.

      Proposed Amendments to Venture Capital Restrictions

      The Association is proposing to amend the Venture Capital Restrictions to exempt offerings in which a qualified independent underwriter performs pricing and due diligence functions. Additional amendments have been proposed by others. These proposals are discussed below and comments are requested on each.

      Participation of Independent Underwriter — The Committee has given particular attention to the conflicts which were intended to be addressed by the Venture Capital Restrictions and the scope of restriction appropriate to assure protection of the public offering process. The potential conflict which exists when a broker/dealer or its control persons seek to sell their holdings while setting an offering price and performing due diligence is not unlike the conflict which exists when a broker /dealer issues its own securities or underwrites securities of an affiliate. Since the early 1970s, the latter conflict has been regulated by Schedule E to Article IV, Section 2 of the NASD By-Laws ("Schedule E"). 5/ Under Schedule E, a broker/dealer which controls, is controlled by, or is under common control with an issuer generally cannot participate in that issuer's initial public offering unless the price is no higher than that recommended by a qualified independent, underwriter who also is responsible for the exercise of usual due diligence. 6/ A qualified independent underwriter must participate in preparing the offering materials and assume underwriter liability pursuant to the Securities Act of 1933. Broker/dealers are required to satisfy specified criteria relating to experience and profitability in order to qualify as independent underwriters 7/

      The Committee believes Schedule E has worked effectively to protect investors from underwriters' potential conflicts of interest and that participation by a qualified independent underwriter could effectively address potential conflicts in situations covered by the Venture Capital Restrictions. Accordingly, the Association is today proposing an amendment to the Venture Capital Restrictions to exempt from the Restrictions any offering in which the price is established by a qualified independent underwriter which exercises the usual standards of due diligence and undertakes underwriter liability pursuant to the Securities Act of 1933. To qualify as an independent underwriter, 8/ a broker/dealer must have been actively engaged in the underwriting of public offerings for five years, have been profitable for three of those five years, and be managed by persons with five years experience in the securities business. The Board and Committee have concluded that the participation of an independent underwriter should effectively alleviate any conflicts of interest on the part of firms or persons who participate in distributing an initial public offering while selling their holdings.

      While the Board and Committee believe that a good approach to correcting difficulties in the Venture Capital Restrictions lies in exempting offerings in which there is an independent underwriter, we recognize that other approaches may be equally effective. The Association therefore encourages commentators to come forward with suggestions for other amendments. Certain other approaches have already been proposed and are under consideration.

      Holding Period — Some have suggested that the Association reinstitute the approach followed for many years prior to adoption of the Venture Capital Restrictions whereby limitations on participation in initial public offerings were inapplicable to securities owned for a specified period prior to the offering. This approach rests on the premise that persons who have had capital at risk for a substantial period should not be penalized by a prohibition against the sale of their holdings as part of the initial public offering or for some period thereafter. As an alternative, a pre-offering holding period could be combined with a shortened post-offering holding period.

      Others have suggested that participating broker/dealers and their control persons be permitted to sell their holdings in a manner similar to that available under SEC Rule 144. 9/ Thus, firms and persons could begin selling their holdings 90 days after completion of the initial public offering but would be subject to the limitations contained in Rule 144 regarding the amount of securities which can be sold. One attraction of this approach lies in the familiarity of the SEC staff, the securities bar, and the industry with the concepts and mechanics of Rule 144.

      Irrespective of the basis for a holding period, the resulting exemption should be clear as to whether securities can be sold as part of the initial offering or only in subsequent offerings or into a trading market. Some suggest prohibiting any sales in an initial public offering by participating broker/dealers or their control persons, irrespective of their satisfaction of a holding period. The earlier NASD rule was interpreted to permit one to register shares which had been held for an appropriate period.

      De Minimis Transactions — Others have suggested that one of the most burdensome inequities of the Venture Capital Restrictions would be alleviated by exempting any broker/dealer whose participation in an offering constitutes a de minimis percentage of the overall offering amount. Similarly, an exemption could be provided for sales of holdings in de minimis amounts. In either case, the exemption could be stated as either a percentage of the offering size or a dollar amount or some combination of both.

      Multiple Exemptions — Several persons have emphasized the need for flexibility in structuring initial public offerings and have recommended that any amendments to the Venture Capital Restrictions should provide more than one type of exemption. For example, all of the exemptive approaches discussed above could be incorporated into the rule as alternatives to be utilized under various circumstances.

      Comment Procedure

      The NASD solicits comments on each of the proposals described above. There are undoubtedly other approaches which could effectively deal with the potential conflicts addressed by the Venture Capital Restrictions. The Association welcomes any comments or suggestions concerning such alternative approaches.

      All comments should be in writing and should be addressed to the following:

      James M. Cangiano
      Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Comments must be received by August 17, 1984 to be assured of consideration. All comments received will be made available for public inspection.

      All comments received during this comment period will be reviewed by the Corporate Financing Committee and changes to the proposed amendments will be recommended as deemed appropriate. If the Board approves amendments to the Corporate Financing Interpretation, those amendments must be filed with, and approved by, the SEC before they become effective. 10/

      Sincerely,

      Gordon S. Macklin
      President


      1/ The Association is also publishing today several interpretations of the present restrictions on venture capital. See NASD Notice to Members 84-37 (July 18, 1984) ("Notice 84-37"). A discussion of the background of the restrictions is included in NASD Notice to Members 83-43 (Aug. 17, 1983).

      2/ NASD Manual (CCH) p. 2033.

      3/ See, NASD Notice to Members 83-24 (May 19, 1983); SEC File No. SR-NASD-83-27.

      4/ As explained in Notice 84-37, the restrictions also apply to "downstream" and "sister" subsidiaries of a broker/dealer and control persons' immediate family members.

      5/ NASD Manual (CCH) p. 1101-3.

      6/ Schedule E, Section 3(c)(l), NASD Manual (CCH) p. 1101-6.

      7/ Schedule E, Section 2(k), NASD Manual (CCH) pp.1101-5 and 1101-6.

      8/ The criteria for an independent underwriter in Schedule E include a prohibition against affiliation with the issuer. For purposes of the Venture Capital Restrictions, a prohibition against affiliation with any selling shareholder may be appropriate.

      9/ 17 CFR Section 230.144.

      10/ In addition to these procedures, any amendments to the proposed Corporate Financing Rule would require a vote of the NASD membership.


    • 84-35 NMS Securities to Surpass 1,000 Mark on July 10, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      With the 49 issues joining NASDAQ's National Market System on Tuesday, July 10, there will be over 1,000 issues trading under real-time trading reporting. These 49 issues meet the SEC's voluntary designation criteria.

      The securities scheduled to join NMS in July are:

      SYMBOL

      COMPANY

      LOCATION

      AELNA

      AEL Industries, Inc. (Cl A)

      Montgomeryville, PA

      AMWI

      Air Midwest, Inc.

      Wichita, KS

      AFCO

      American First Corporation

      Oklahoma City, OK

      AMMG

      American Magnetics Corporation

      Sherman Oaks, CA

      AMPD

      Ampad Corporation

      Holyoke, MA

      ATCO

      Atcor, Inc.

      Harvey, IL

      BFXC

      BFI Communications Systems, Inc.

      Utica, NY

      BFCS

      Boston Five Cents Savings Bank FSB

      Boston, MA

      CDIC

      Cardinal Distribution, Inc.

      Columbus, OH

      CCON

      Circon Corporation

      Santa Barbara, CA

      CLRS

      Claire's Stores, Inc.

      Hialeah, FL

      CDPI

      Columbia Data Products, Inc.

      Columbia, MD

      DHULZ

      Dorchester Hugoton, Ltd.

      Dallas, TX

      DBHI

      Dow B. Hickam, Inc.

      Sugar Land, TX

      EDCM

      Educom Corporation

      Philadelphia, PA

      FCOM

      First Commerce Corporation

      New Orleans, LA

      FSBF

      First Savings Bank of Florida FSB

      Tarpon Springs, FL

      GOTLF

      Gotaas-Larsen Shipping Corporation

      Hamilton, Bermuda

      GRPH

      Graphic Industries, Inc.

      Atlanta, GA

      GBCO

      Gulf Broadcast Company

      Dallas, TX

      HDCO

      Hadco Corporation

      Salem, NH

      HRTG

      Heritage Bancorporation

      Jamesburg, NJ

      JBHT

      Hunt (J.B.) Transport Services, Inc.

      Lowell, AR

      HRCLY

      Huntingdon Research Centre, PLC

      Cambridgeshire, England

      INAC

      Inacomp Computer Centers, Inc.

      Troy, MI

      IHPI

      Independence Health Plan, Inc.

      Southfield, MI

      IMET

      Intermetrics, Inc.

      Cambridge, MA

      KTCC

      Key Tronic Corporation

      Spokane, WA

      KIDS

      L.J.N. Toys, Ltd.

      New York, NY

      LAWS

      Lawson Products, Inc.

      Des Plaines, IL

      MACG

      MacGregor Sporting Goods, Inc.

      East Rutherford, NJ

      MBOX

      Math Box, Inc. (The)

      Rockville, MD

      MCBK

      Merchants Cooperative Bank

      Boston, MA

      MERB

      Merrill Bankshares Company

      Bangor, ME

      MGRE

      Merry-Go-Round Enterprises, Inc.

      Towson, MD

      MINY

      Miniscribe Corporation

      Longmont, CO

      NAUGW

      Naugles, Inc. (Wts)

      Fullerton, CA

      NTLB

      National Lumber & Supply, Inc.

      Santa Ana, CA

      OGIL

      Ogilvy & Mather International Inc.

      New York, NY

      PBEN

      Puritan-Bennett Corporation

      Overland Park, KS

      PTCI

      Pullman Transportation Company, Inc.

      Chicago, IL

      RSYS

      Restaurant Systems, Inc.

      Atlanta, GA

      RNIC

      Robinson Nugent, Inc.

      New Albany, IN

      SCIE

      Scientific Computers, Inc.

      Minnetonka, MN

      SWIX

      Shelby Williams Industries, Inc.

      Chicago, IL

      SFDS

      Smithfield Foods, Inc.

      Arlington, VA

      STHMK

      Stanhome Inc.

      Westfield, MA

      WSTM

      Western Micro Technology Inc.

      Cupertino, CA

      ZITL

      Zitel Corporation

      San Jose, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-34 Implementation of the NASAA/CRD Temporary Agent Transfer Program (TAT) Via the Central Registration Depository — Need to File Broker-Dealer Undertaking

      TO: All NASD Members and Other Interested Persons

      BACKGROUND

      The securities industry, in late 1983, asked the North American Securities Administrators Association (NASAA) to review the registration delays resulting from agent transfers between broker-dealers. After extensive deliberations by the NASAA/CRD Committee and its NASD advisors, a Temporary Agent Transfer program was developed by the Committee and approved by the NASAA membership at its spring meeting on April 28, 1984.

      The NASD Board endorsed the Temporary Agent Transfer concept at its November, 1983 meeting. This endorsement together with the NASAA membership approval has paved the way for the implementation of this new program.

      Historically, it has taken a considerable amount of time to transfer the registration of a representative from one firm to another. Although the Central Registration Depository (CRD) has significantly reduced the overall time to effect a transfer, there are outside factors which have continued to impede a timely transfer, i.e., the U.S. mail. From the regulatory perspective, termination requirements create delays in those state jurisdictions which require the filing of a U-5 before permitting approval of a transfer to occur. Both administrative delays as well as the lack of timely submissions by terminating firms amplify this problem.

      Factors such as these have led to unreasonable delays and burdens on the individual representatives which preclude them from conducting business during the interim period.

      Given the technological advances made by the CRD, a new program is being implemented to correct the long standing problem. This program, known as The NASAA/CRD Temporary Agent Transfer (TAT), will become effective on July 2, 1984 via the CRD. Prior to a Firm's participation in this program, a "Broker-Dealer Undertaking" must be submitted with the CRD.

      PROGRAM DESCRIPTION

      The Temporary Agent Transfer program will permit the immediate transfer of an agent upon telephone or Firm Access Query System (FAQS) notification to the CRD. The TAT program will replace the NASD's conditional approval process and will be effective for NASD registration as well as participating State jurisdictions.

      Participation in the TAT program does require the execution and one time filing of the enclosed "Broker-Dealer Undertaking" with the CRD which outlines the terms, limitations and conditions of the program. The components of the TAT program and the CRD role are substantially as follows:

      • Eligibility

      * Applicants and broker-dealers must be currently registered with the NASD and each jurisdiction where temporary transfer of registration is requested.

      * Applicants must be currently qualified by examination and registered in the category which is requested in the transfer.

      * Applicants must have terminated their employment and registration with a terminating broker-dealer, without disciplinary reasons, within the preceding seven (7) calendar days of the transfer request.

      * Applicants may only sell securities for the firm to which temporary transfer is made.

      * Applicants must submit to the employing broker-dealer a complete signed Form U-4 that has no affirmative responses to the disciplinary questions contained on the form.

      * The broker-dealer must have sufficient funds on deposit with the CRD to pay the required registration fees generated by the applicant transfer request.

      * All temporary registrations effected through the TAT program expire twenty-one (21) calendar days after issuance unless the temporary registration is made permanent by receipt of a properly completed and executed Form U-4 for the applicant.

      • Member Firm Responsibilities

      * The broker-dealer must review the Form U-4 submitted by the agent to determine if it is complete and signed by the individual.

      * The broker-dealer must take appropriate steps to verify the information contained on the form.

      * The broker-dealer must contact the terminating firm and verify that the individual terminated without disciplinary reasons within the preceding seven (7) calendar days.

      * The broker-dealer must submit the complete signed Form U-4 to the CRD within the twenty-one (21) day temporary registration period.

      * The broker-dealer must promptly withdraw the temporary registration by submitting a Form U-5 to the CRD if there is a material change in the application which would have resulted in the individual being ineligible for the temporary registration. Registration must then be pursued through the filing of a Form U-4 and fees in the normal fashion.

      * The broker-dealer must properly supervise each person subject to a temporary transfer to prevent the unauthorized offer and sale of securities in jurisdictions where no temporary registration is in effect and in the event that the twenty-one (21) day temporary registration expires without receiving a permanent registration.

      THE ROLE OF THE CRD

      By the implementation of this new program, the CRD will be changing a few basic operating principles. First is the processing of Form U-5 Termination Notices. An integral part of the TAT program involves the tracking of terminations. Upon issuance of a temporary registration, the CRD will not only send confirmation to the new firm but it will also send a notice to the terminating firm to advise them of the individual's termination and the need for the prompt filing of a Form U-5. Should the required U-5 not be received within thirty (30) days of the issuance of the temporary registration, the system will automatically debit the firm's CRD account for a "late U-5 fee" as provided for in the NASD By-Laws. When this is done both the firm and the applicable State Jurisdictions will be notified through the system. This tracking system will not only apply to the TAT program but for all terminations. When a transfer is processed in the normal fashion via the filing of a Form U-4, the terminating broker-dealer will be notified of the termination and will be subject to the same thirty (30) day filing period.

      The second major element to this new program is that all temporary registrations will expire unless a complete U-4 is received by the CRD within the twenty-one (21) day period. Those U-4 forms received after the twenty-first day, when the temporary registration expires, will again cause full fees to be deducted from the firm's BD account upon processing of the Form U-4.

      The word "complete" is defined as having all data requested on the form present and in such a manner so as not to cause a "deficiency" condition to be generated by the CRD system. Further, the form must be manually signed, notarized and be accompanied by a photograph and fingerprint card unless exempted by Rule 17f-2. Should the form be received and processed with deficiencies, amendment filings to correct the deficiency conditions must be received by the twenty-first day or the temporary registration will expire. Members using the TAT program are therefore advised and encouraged to take every precaution to ensure each form submitted for a person subject to the TAT program is truly "complete" and filed promptly.

      Allowances have been made by the CRD system to expire only the temporary transfers for those forms received after the twenty-first day. The program bases its comparison on the date received, not the date the form is processed.

      Upon filing an executed Broker-Dealer Undertaking, a copy of which is attached, the member will designate a TAT password which must be used each time a request for a temporary transfer either by telephone or through a FAQS terminal is made. This password will be communicated to the appropriate party at the firm and thereafter the security of its use rests with the member. Telephone requests for temporary transfers should be directed to the CRD Communications Center at 202-728-8800. Those Members who are participating in the FAQS program will be sent an update for their FAQS manual which will fully describe the procedures. System entry of the TAT assigned password will be required for execution of a transfer through the FAQS system.

      Further communications relating to the implementation of this program will be addressed in upcoming issues of the Q&R Report. Shortly after July 2, 1984, a Q&R issue will list any States that elect to not participate in the TAT program.

      A description of the TAT program and a Broker-Dealer Undertaking are enclosed in order to provide each member with the complete program definition. If your firm intends to join, an executed Broker-Dealer Undertaking for participation in the TAT program should be forwarded to Craig Thompson, Assistant Director, Special Registration Review, 1735 K Street, N.W., Washington, D.C. 20006.

      Questions related to the TAT program may be addressed to the CRD Communications Center at 202-728-8800.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachments

      NASAA/CRD TEMPORARY AGENT TRANSFER PROGRAM

      APRIL 28, 1984

      I. INTRODUCTION

      The North American Securities Administrators Association, Inc. (hereinafter "NASAA") has deemed it to be in the public interest and consistent with the goals of investor protection to provide an efficient, expedient, and uniform temporary agent transfer program for securities sales agents (hereinafter "agent") transferring from a registered broker-dealer (hereinafter "terminating broker-dealer") to another registered broker-dealer (hereinafter "employing broker-dealer"). The implementation of the temporary agent transfer program will permit an immediate transfer of an agent upon telephone or FAQS notification to the Central Registration Depository System (hereinafter "CRD").

      II. DISCUSSION

      The basic premise underlying agent registration on the CRD is a requirement to file a uniform application for securities industry registration form (hereinafter "Form U-4") for entry into the CRD and a uniform termination of securities industry registration form (hereinafter "Form U-5") to exit the CRD System. This system functions efficiently for the initial registration of an agent but it is occasionally burdensome for the transfer of an agent from a terminating broker-dealer to an employing broker-dealer.

      There are many problems associated with the requirements of the filing of Form U-5 prior to registering an agent with an employing broker-dealer. The filing of Form U-5, required to be signed and submitted by the terminating broker-dealer, is often delayed for administrative reasons and is sometimes intentionally withheld by the terminating broker-dealer so that the agent will not be able to service former clients. This tactic provides unreasonable delays and burdens on the agent and does not allow the agent to conduct business during the interim processing period.

      The employing broker-dealer, attempting to aid the new agent during this period often violates state law by allowing the agent to offer and sell securities prior to the effective date of the registration. This is not an acceptable method of agent transfer. With the technological advances made by the CRD a new program must be implemented to correct what is an apparent deficiency in the registration process.

      It is imperative that Form U-5 be promptly filed by the terminating broker-dealer in order for the CRD and the states to have the reason for termination and whether disciplinary proceedings may have been the reason for the termination. This procedure is needed in order to maintain up-to-date records on registered agents and to provide a mechanism for disciplinary reporting. The NASAA/CRD Committee is currently working with the National Association of Securities Dealers (hereinafter "NASD") to provide for uniform interpretations and procedures for the filing of Form U-5.

      The NASAA/CRD Committee met in Savannah, Georgia, on November 17-18, 1983, to consider a temporary agent transfer program. Tentative drafts were submitted by the committee chairman and the NASD representatives. The basic concept was agreed upon and further discussed in a telephone conference on December 2, 1983.

      On December 20, 1983, a proposal for a temporary agent transfer program was submitted to the NASAA membership. On January 21, 1984, the NASAA Board of Directors approved the general concept of the program and authorized the distribution of the proposal for comment and a public hearing.

      On February 28, 1984, a public hearing was held in the World Trade Center in New York City. The following persons testified at the hearing: James McCormick, NASD Registration Committee; Michael Kiey, SIA State Regulation Committee; Ray Vass, SIA Legal and Compliance Section; and Nancy Lopez, Association of Registration Managers.

      This proposal incorporates certain changes approved by the NASAA/CRD Committee as a result of the aforementioned hearing. The program was approved by the NASAA membership on April 28, 1984, at its annual spring meeting in Washington, D.C. The system implementation date is scheduled for July 1, 1984.

      The NASAA Forms Revision Committee is currently considering certain changes to Forms U-4 and U-5 that may allow the program to be amended, at a later date, to confirm further requests made at the public hearing.

      Generally speaking, the NASAA/CRD temporary agent transfer program involves a participating broker-dealer completing the Broker-Dealer Undertaking for participation in the NASAA/CRD temporary agent transfer program; a telephone or FAQS notification to the CRD for an agent who terminates, without disciplinary reasons, his employment and registration with the terminating broker-dealer the preceding seven (7) calendar days; the timely filing of a completed and signed Form U-4; the timely filing of Form U-5; and the issuance of a twenty-one (21) day temporary registration.

      III. TEMPORARY AGENT TRANSFER PROGRAM

      The NASAA/CRD temporary agent transfer program shall be applicable in all CRD states unless a state notifies the CRD, in writing, that it does not desire to participate in the NASAA/CRD temporary agent transfer program. The program shall be subject to the terms, conditions and limitations described in this report and the Broker-Dealer Undertaking for participation in the NASAA/CRD temporary agent transfer program.

      A. AGENT In order to qualify for temporary agent transfer, the agent must:
      1. Have terminated employment and registration with the terminating broker-dealer, without disciplinary reasons and within the preceding seven (7) calendar days;
      2. Have no disciplinary history that would require disclosure on Form U-4;
      3. Complete, sign and submit to the employing broker- dealer a Form U-4 that has "no" answers to questions 27, 28 and 29;
      4. Have been properly registered in each jurisdiction where registration is requested; and
      5. Be qualified by examination for the type of registration requested.
      B. PARTICIPATING BROKER-DEALER A broker-dealer participating in the temporary agent transfer program must:
      1. Execute and file with the CRD the Broker-Dealer Undertaking for participation in the NASAA/CRD temporary agent program;
      2. Have sufficient funds on deposit with the CRD to pay the required regulatory fees;
      3. Preview the Form U-4 submitted by the agent to determine that it is complete (except for fingerprints and photographs), signed by the agent, and ready for submission to the CRD;
      4. Take appropriate steps to verify the statements in the Form U-4 and inquire into the past record and reputation of the agent.
      5. Contact the terminating broker-dealer to verify that the agent terminated employment and registration with said broker-dealer within the preceding seven (7) calendar days, without disciplinary reasons.
      6. Have an authorized person contact the CRD by telephone or FAQS and report, confirm, or verify the required information, to allow issuance of a NASAA/CRD temporary registration;
      7. Submit the completed and properly signed Form U-4 to the CRD prior to the expiration of the twenty-one (21) day temporary registration.
      8. Promptly notify the CRD upon any material changes in the application or information submitted to the CRD on behalf of an agent;
      9. Promptly notify the CRD upon receipt of any material changes in the application or information submitted to the CRD on behalf of an agent, and in the event such information would have resulted in the agent being ineligible for the temporary registration, the broker- dealer will, during the pendency of the temporary registration, immediately withdraw the agent's registration by submitting a Form U-5 to the CRD terminating the registration in each state where the agent was the subject of a temporary registration. A new application and registration fee will be required to further consider such applicant for registration.
      10. Promptly file Form U-5 for all terminated agents;
      11. Furnish information to an employing broker-dealer concerning a terminated agent, including but not limited to the answers to be submitted for questions 13 and 14 on Form U-5, and
      12. Properly supervise each agent subject to a temporary registration in order to prevent the unauthorized offer and sale of securities in the event the temporary registration expires after twenty-one (21) days.
      C. THE CENTRAL REGISTRATION DEPOSITORY In order to properly administer the CRD record keeping functions, the NASD will:
      1. Process all temporary agent transfer requests;
      2. Provide adequate password security (see Exhibit "8") for identifying participating broker-dealers authorized to request temporary agent transfers;
      3. Establish procedures to receive and edit the required information to effectuate a temporary agent transfer;
      4. Provide specific edit procedures for verification of information regarding disciplinary history, previous employment, registration history, and regulatory fees, and for timely notices to the broker-dealer of filing deficiencies;
      5. Collect and disburse regulatory fees;
      6. Send a notice of temporary agent registration to the employing broker-dealer reflecting a twenty-one (21) day expiration date;
      7. Send a notice to the terminating broker-dealer demanding the prompt filing of Form U-5;
      8. Notify each CRD state, via the on-line accounting system, of each temporary registration processed for its jurisdiction;
      9. Provide each CRD state with the capability of terminating a temporary agent registration;
      10. Notify each CRD state, via the mail command, of the expiration of the temporary agent registration for the failure of the employing broker-dealer to file a completed and non-deficient Form U-4;
      11. Process each complete Form U-4 received within twenty-one (21) calendar days of the temporary agent registration and approve the permanent registration in accordance with automatic approval criteria established by the CRD System; however, each state may elect to terminate such registration according to its specific registration criteria;
      12. Send a notice to the employing broker-dealer of the effectiveness of the permanent registration (the effective date shall be the date of the temporary registration), subject to termination by an individual CRD state;
      13. Notify the respective CRD states when a deficient Form U-4 is received on a temporary agent registration and allow the state to take whatever action it deems appropriate including approval, denial, or postponement. In the absence of an approval or denial by a jurisdiction, each temporary registration will expire on its expiration date unless a completed and non-deficient Form U-4 is filed with the CRD;
      14. Notify the employing broker-dealer when a deficient Form U-4 is received on an applicant subject to a temporary agent registration;
      15. Process a Form U-4 received after the temporary registration has expired in accordance with the requirements of a new registration and collect and disburse the required regulatory fees incident to such registration;
      16. Notify each CRD state when a Form U-5 is not received at the time a temporary registration is made permanent; and
      17. Notify each CRD state when the NASD administers a penalty against a participating broker-dealer registered in such state for failing to timely file Form U-5.
      D. CRD STATES Each CRD state participating in the temporary agent transfer program:
      1. Will accept automatic approval of a temporary and permanent agent registration, as set forth in Section C, providing a completed and non-deficient Form U-4 is received by the CRD prior to the expiration of the temporary agent registration; however, each jurisdiction shall maintain the right to terminate such registration according to its individual requirements;
      2. May terminate a temporary and permanent registration at any time, in accordance with its individual regulatory requirements;
      3. Will take whatever action it deems necessary and appropriate against participating broker-dealers for their failure to timely file Forms U-4 and promptly file Forms U-5 or for violating any other provision of the NASAA/CRD undertaking for participation in the temporary agent transfer program;
      4. May suspend the temporary agent transfer program privileges of a participating broker/dealer, provided, however, that the enforcement of this sanction rests solely with the individual states and not be techno logically enforced by the CRD System; and
      5. Will have the right to withdraw from the temporary agent transfer program upon written notice to the CRD System and the president of the North American Securities Administrators Association, Inc.

      IV. CONCLUSIONS

      The agent transfer problem is one of the most common criticisms of state securities regulation. It is a problem that can be solved by NASAA, the NASD, the CRD System, and the securities industry. This efficient and expedient agent transfer program is based on sound logic, and it is reasonable in light of investor protection, industry regulation, and regulatory efficiency. This program will not deter any state from its mandated regulatory responsibilities but will actually assist the regulatory program by providing timely information and reports.

      V. NASAA CRD COMMITTEE MEMBERS

      H. Wayne Howell, Chairman
      Georgia Securities Division
      Suite 802, West Tower
      2 Martin Luther King Jr. Drive
      Atlanta, Georgia 30303
      404/656-7810

      Peggy Peters, Vice Chairman
      Texas Securities Commission
      P.O. Box 13167, Capitol Station
      Austin, Texas 78711
      512/474-2233

      Nancy Diana, Secretary
      Pennsylvania Securities Commission
      471 Forum Building
      Harris burg, Pennsylvania 17120
      717/787-8061

      Nancy Jones
      Assistant Securities Commissioner
      #1 Capitol Mall, 4B, 206
      Little Rock, Arkansas 72201
      501/371-1101

      Stanley Lewis
      Deputy Securities Commissioner
      816 Keenan Building
      Columbia, South Carolina 29201
      803/758-2833

    • 84-33 Independence Day Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Wednesday, June 4, 1984, in observance of Independence Day. "Regular Way" transactions made on the business days noted below will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      June 26

      July 3

      July 6

      27

      5

      9

      28

      6

      10

      29

      9

      11

      July 2

      10

      12

      3

      11

      13

      4

      Markets Closed

      5

      12

      16

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice. Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-32 June S. Jones Co. 225 S. W. Broadway Portland, Oregon

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On June 6, 1984, the United States District Court for the District of Oregon appointed a SIPC Trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSR8 Rule G-12 (h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Richard H. Huntington, Esquire
      Stoel, Rives, Boley, Fraser & Wyse
      900 S. W. Fifth Avenue
      Portland, Oregon 97204
      Telephone: (503) 224-3380

    • 84-31 First Interwest Securities Corp. 7800 E. Union Avenue, Suite 900 Denver, Colorado 80237

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On June 7, 1984, the United States District Court for the District of Colorado appointed a SIPC Trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Glen E. Keller, Jr., Esquire
      Davis, Graham & Stubbs
      2600 Colorado National Building
      950 Seventeenth Street
      P.O. Box 185
      Denver, Colorado 80201
      Telephone: (303) 892-9400

    • 84-30 Monthly Statistical Report Subscription Service

      TO: All NASD Members and NASDAQ Subscribers

      We are pleased to announce that the NASD is now offering a new NASDAQ data service. Subscribers to this service may receive copies of the Monthly Statistical Report (MSR) for all or a select group of NASDAQ issues on either an annual subscription or single-month order basis. Each MSR includes daily, weekly and monthly price, volume and market maker information for securities traded in the NASDAQ System and the NASDAQ National Market System (NMS). The report also recaps daily NASDAQ market data including index values and aggregate system volume.

      MSRs are available either on microfiche or in printed form. Each month's MSR data for all securities traded in NASDAQ are recorded on 32 separate microfiche sheets and include a cross-reference index of NASDAQ company names and trading symbols.

      The most economical service offered is the annual subscription. For a charge of $50 per year, subscribers will receive microfiche copies of MSRs for all NASDAQ issues each month, beginning with the January report. (A sample microfiche covering 207 NMS issues is included with this notice for your reference. A 42x magnification lens is the best size for viewing the film on a microfiche reader.) Therefore, for a modest annual subscription fee, subscribers will be able to build a complete historical record of every security traded in the NASDAQ System. Those who are interested in receiving MSR information for shorter periods may purchase monthly data at a cost of $10 per monthly set of microfiche.

      Hard-copy reports are also available on individual NASDAQ securities on both a standing monthly and a single month order basis at a cost of $5 per security per month. Unlike the microfiche data, which is only available for reports beginning with January 1984, hard-copy reports may be purchased for any month as early as January 1980. A sample of a hard-copy MSR (for an NMS issue) is also enclosed with this notice.

      If you are interested in receiving this new service, please complete and return the attached order form in the envelope provided. Please do not include payment with your order; you will be billed after you have received your first hard-copy report or set of microfiche.

      Questions with respect to the MSR Subscription Service should be directed to Anita Baker at (202) 728-8025 or Celia Kramer at (202) 728-8026.

      Sincerely,

      John T.Wall
      Executive Vice President
      Member and Market Services

      Enclosures

      PDF TO BE INCLUDED

    • 84-29 48 Securities Mandated to Join NMS on June 19, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      An additional 46 securities will join the 926 trading in the NASDAQ National Market System on Tuesday, June 19, 1984. These 46 securities have met the SEC's voluntary designation criteria, which include six-month average trading volume of 100,000 shares a month and a minimum bid price of $5.

      The 46 securities scheduled to join NMS on Tuesday, June 19, are:

      Symbol

      Company

      Location

      AAME

      Atlantic American Corporation

      Atlanta, GA

      AVAC

      Avacare, Inc.

      Dallas, TX

      LIFT

      Aviation Group, Inc. (The)

      Raleigh, NC

      BART

      Barton Valve Company, Inc.

      Shawnee, OK

      TRUK

      Builders Transport, Incorporated

      Camden, SC

      BUSL

      Businessland, Inc.

      San Jose, CA

      CBSS

      Central Bancshares of the South, Inc.

      Birmingham, AL

      CWTE

      Commonwealth Telephone Enterprises, Inc.

      Dallas, PA

      DSCC

      Datasouth Computer Corporation

      Charlotte, NC

      DETX

      Detector Electronics Corporation

      Minneapolis, MN

      DRAN

      Dranetz Technologies, Inc.

      Edison, NJ

      EIPM

      EIP Microwave, Inc.

      Newport Beach, CA

      ELDN

      Eldon Industries, Inc.

      Inglewood, CA

      ENDV

      Endevco,Inc.

      Dallas, TX

      FDPC

      FDP Corporation

      Miami, FL

      FHSY

      Family Health System, Inc.

      Paramus, NJ

      FLCO

      Finalco Group, Inc.

      McLean, VA

      FAMR

      First American Financial Corporation (The)

      Santa Ana, CA

      FFSB

      First Federal Savings Bank of California

      Santa Monica, CA

      FCOA

      Foremost Corporation of America

      Grand Rapids, MI

      HCWH

      Homecrafters Warehouse, Inc.

      Birmingham, AL

      INGN

      Integrated Genetics, Inc.

      Framingham, MA

      IRND

      Interand Corporation

      Chicago, IL

      ITCP

      International Technology Corporation

      Torrance, CA

      LPAI

      La Petite Academy, Inc.

      Kansas City, MO

      LEXI

      Lexicon Corporation

      Ft. Lauderdale, FL

      LILY

      Lily-Tulip, Inc.

      Augusta, GA

      LIND

      Lindberg Corporation

      Chicago, IL

      MFED

      Metropolitan Federal Savings & Loan Association of Fargo

      Fargo, ND

      NBAN

      National Bancshares Corporation of Texas

      San Antonio, TX

      NGNA

      Neutrogena Corporation

      Los Angeles, CA

      NBSC

      New Brunswick Scientific Co., Inc.

      Edison, NJ

      PHXA

      Phoenix American, Incorporated

      Mill Valley, CA

      SEEQ

      SEEQ Technology Incorporated

      San Jose, CA

      SFEM

      SFE Technologies

      San Fernando, CA

      SHAS

      Shawmut Corporation

      Boston, MA

      SAGA

      Software AG Systems, Inc.

      Reston, VA

      STBK

      State Street Boston Corporation

      Boston, MA

      SISC

      Stewart Information Services Corporation

      Houston, TX

      SUBC

      SUBURBAN Bancorp

      Bethesda, MD

      TEMC

      Temco Home Health Care Products, Inc.

      Passaie, NJ

      THPR

      Thermal Profiles, Inc.

      Plainview, NY

      TSYS

      Total Systems Services, Inc.

      Columbus, GA

      UBAK

      United Bancorporation Alaska, Inc.

      Anchorage, AK

      USCF

      USACafes

      Dallas, TX

      WFSA

      Western Federal Savings & Loan Association

      Marina del Rey, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trading reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-28 Amendments to Appendix F Concerning Sales Incentives for Direct Participation Programs

      TO: All NASD Members and Other Interested Persons

      Attn: Direct Participation Programs Department

      The provisions of Appendix F to Article III, Section 34 of the Association's Rules of Fair Practice ("Appendix F") relating to the use of sales incentive arrangements in public offerings of direct participation programs have been amended.

      The amendments were distributed to the membership for their comment and were subsequently approved by the Association's Board of Governors. The amendments were published in the Federal Register and subsequently approved by the Securities and Exchange Commission on April 11, 1984.

      Background

      The provisions of Sections 5(e) and 5(f) of Appendix F provide for an equitable evaluation of sales incentives under the underwriting compensation guidelines. They also require disclosure to the public investor of the use of sales incentive programs. Finally, they are designed to permit members participating in public offerings of programs utilizing such arrangements to appropriately supervise their salesmen and maintain required books and records.

      The Association's Direct Participation Programs Committee proposed amendments to Appendix F to address concerns regarding the use of sales incentive arrangements in public offerings of direct participation programs. Arrangements for sales incentives have often been organized by direct participation program sponsors and have been offered directly to sales forces. Such arrangements may circumvent the member which is responsible for supervision of its salesmen and for maintenance of books and records. In addition, use of sales incentive arrangements may, in the absence of appropriate supervision of the sales force, undermine the affirmative suitability determination called for under Appendix F.

      Explanation of Amendments

      Section 5(f) of Appendix F has been amended to require that all sales incentives be paid to a member and that such incentives be paid only in the form of cash. Cash payment of sales incentives will require the sales incentive to flow through the books and records of the member. This provision is intended to place control over the disposition of the incentives with the member. The member could, therefore, distribute incentives to salesmen or retain them.

      The remaining amendments to Sections 5(e) and 5(f) of Appendix F are technical and conforming in nature.

      The text of amended Sections 5(e) and 5(f) of Appendix F is attached. Any questions regarding this Notice should be directed to Harry E. Tutwiler of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      The Association is requesting comments on the proposed amendments prior to final Board consideration. All comments received during this comment period will be reviewed by the Direct Participation Programs Committee and changes to the amendments will be recommended as deemed appropriate. The Board of Governors will then consider the amendments again. If the Board approves the amendments, they must be filed with, and approved by, the Securities and Exchange Commission before they become effective.

      All written comments should be addressed to the following:

      S. William Broka, Secretary
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      All comments must be received by April 25, 1983. All comments received will be made available for public inspection.

      Any questions regarding this notice should be directed to Dennis C. Hensley or Harry E. Tutwiler of the Corporate Financing Department at (202) 728-8258.

      Sincerely,

      Frank J. Wilson
      Executive Vice President
      Legal and Compliance

      Attachment

      DRAFT AMENDMENT TO APPENDIX F

      Amend Subsections 5(e) and (f) as follows: *

      (e) No sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program shall provide any sales incentive item, including, but not limited to, travel bonuses, prizes, and awards, directly to a person associated with a member unless:
      (1) the aggregate value of all such items to be received by each associated person during any year does not exceed $50;
      (2) the value of all such items to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of paragraph (b)(l) of this section; and
      (3) the proposed payment or transfer of all such items to be made available in connection with an offering is are disclosed in the prospectus or similar offering document.
      (f) No sponsor, affiliate of a sponsor, or program shall provide compensation to a member in the form of sales incentives or bonuses items including, but not limited to, travel bonuses, prizes, and awards unless all of the following conditions are satisfied:
      (1) all sales incentives and bonuses are paid directly to the member in cash and the distribution, if any, of incentives or bonuses to associated persons is controlled solely by the member;
      (1) a fair market dollar value of the incentive items has been established;
      (2) the value of all such items incentives or bonuses to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of subsection (b) of this section;
      (3) arrangements relating to the proposed payment or transfer of all such items incentives or bonuses, including the formula or formulae used to determine

      AMENDMENTS TO APPENDIX F

      Sections 5(e) and 5(f) of Appendix F to Article III, Section 34 of the Rules of Fair Practice have been amended as follows:*

      ••••

      (e) No sponsor, affiliate of a sponsor (other than a member dealing with persons associated with that member), or program shall provide any sales incentive item, including, bat net limited to, travel bonuses, prizes, and awards directly to a person associated with a member unless:
      (1) the aggregate value of all such items to be received by each associated person during any year does not exceed $50.00;
      (2) the value of all such items to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of paragraph subsection (b) (l) of this section; and
      (3) the proposed payment or transfer of all such items to be made available in connection with an offering is are disclosed in the prospectus or similar offering document.
      (f) No sponsor, affiliate of a sponsor, or program shall provide compensation to a member in the form of sales incentives or bonuses items including but not limited travel bonuses, prizes, and awards unless all of the following conditions are satisfied;
      (1) all sales incentives and bonuses are paid directly to the member in cash and the distribution, if any, of incentives or bonuses to associated persons is controlled by the member;
      (1) a fair market dollar value of the incentive items has been established,
      (2) the value of all such items incentives or bonuses to be made available in connection with an offering is included as compensation to be received in connection with the offering for purposes of subsection (b) of this section;
      (3) arrangements relating to the proposed payment or transfer of all such items incentives or bonuses are disclosed in the prospectus or similar offering document; and
      (4) the manner of receiving all such items and their subsequent disposition whether the associated persons or otherwise, is entered solely by the member in a manner which enables the member to properly supervise its associated persons and
      (4)
      (5) the value of all incentives and bonuses is reflected on the books and records of the recipient member as compensation received in connection with the offering.

      * New language is underlined; deleted language is stricken.

      * New language is underlined; deleted language is stricken. All other sections of Appendix F remain unchanged. The full text of Appendix F may be found in NASD Manual (CCH) para. 2192.

    • 84-27 SEC Request For Comments on NASDAQ Options Proposal (Comment Period Ends on June 15, 1984)

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: All NASD Members

      On April 12, 1984, the SEC issued Release No. 34-20853 requesting public comments on the NASDAQ Options Program. The text of this release, together with a document which provides an overview of the NASDAQ Options Program and a fact sheet highlighting major features of the program, are enclosed with this notice.

      The Commission's release also solicits comments on proposals by the Chicago Board Options Exchange and the American, Pacific, Philadelphia and New York Stock Exchanges to trade options on NASDAQ NMS securities.

      The SEC's decisions on vital issues raised in the enclosed release will determine whether you, as NASDAQ market makers, will be permitted to trade standardized options on NASDAQ NMS securities in the NASDAQ market or whether these options will be traded on the exchanges.

      In sum, the Commission's decisions on important questions raised in the attached release, as influenced by comments received, will determine the future market structure for standardized options trading. Because of the importance of the issues involved, the Board of Governors strongly urges members to comment on the release.

      This notice and the enclosed material have been prepared to assist members in reviewing the Commission's release and preparing comments thereon.

      Review of the NASDAQ Options Proposal and SEC Request for Comments

      As explained in the enclosed fact sheet and overview, the NASDAQ Options Program will permit the quotation display of standardized put and call options on certain actively traded NASDAQ National Market System ("NMS") securities and certain NASDAQ and NASDAQ NMS indices.

      Several new and innovative second generation concepts in options trading are being built into the NASDAQ Options Program. These include a small order execution system and the introduction of facilities for creating "locked-in" trades for purposes of trade reporting, confirmation, comparison and clearance.

      The NASD's Board of Governors believes that the NASDAQ Options Program represents a major step forward in the evolution of industry facilities which will provide an options market that is superior to any that is in place today.

      Comments on the SEC's Release

      The Commission's release solicits comments on many details of the NASDAQ Options Program and members are encouraged to carefully read the Commission's Release and provide their input in this regard.

      In addition to these specific comments, the SEC is raising certain threshold issues, resolution of which will shape the future market structure for standardized options trading. These issues, which the Board urges members to comment on, are as follows:

      • "Integrated" or "side-by-side" trading in the NASDAQ Options Program.
      • Decisions as to which markets will be permitted to trade NASDAQ options.
      • The desirability of automatic executions and locked-in trades for options and other advanced features of the NASDAQ Options Program.
      • Surveillance requirements for NASDAQ options trading involving both options and underlying securities.

      Integrated Trading

      The focal point of the Association's proposed program is the ability of members to make markets simultaneously in both options and their underlying securities, i.e., "side-by-side" or "integrated" market making. Integrated market making will be permitted only when there are a minimum of ten market makers in an underlying NASDAQ security and five market makers in its related NASDAQ option. Having carefully studied this issue, the Association's Board has concluded that the ability of firms to make side-by-side markets is not only appropriate but also extremely desirable given the highly competitive nature of the NASDAQ market. In the competitive NASDAQ market, there is little justification for prohibiting members from simultaneously making markets in both stocks and options.

      In this regard, an analysis of integrated trading in warrants and underlying equities via NASDAQ has shown to the Board's satisfaction that this practice does not raise undue regulatory concerns and, in fact, may increase market maker participation in both equity and derivative securities markets and may improve the quality of markets for underlying securities. The results of this study on integrated trading in warrants and equities are contained in a document entitled An Analysis of the Economic and Regulatory Issues Relating to Integrated Market Making in Options and Underlying Securities on NASDAQ. This study, which was filed with the SEC on December 22, 1983, may be obtained from the Association upon request.

      Because integrated trading will benefit NASDAQ market makers and the NASDAQ market without raising concomitant regulatory concerns, the Board of Governors strongly urges members to support integrated trading in the NASDAQ Options Program in their comments to the SEC on the enclosed Release.

      Exchange vs. NASDAQ Trading of Options on NASDAQ NMS Securities

      In addition to requesting comments on the NASDAQ Options Program, the Commission's release also solicits comments on proposals by the Chicago Board Options Exchange and the American, Pacific, Philadelphia and New York Stock Exchanges to trade options on NASDAQ NMS securities.

      Current SEC policies do not permit the trading of an options class in more than one market, a practice referred to as "multiple trading." The exchanges' and the NASD's proposals to trade options on NASDAQ NMS securities have caused the Commission to revisit the question of whether it should continue to prohibit multiple trading.

      Today, as an alternative to multiple trading, optionable underlying securities are allocated among the exchanges by lottery. Once allocated, options on selected securities become the exclusive franchise of an exchange.

      These allocation procedures, if extended to underlying NASDAQ NMS securities which the options exchanges propose to trade, would, in the Board's view, have adverse competitive impacts on the NASDAQ Options Program. Because an extension of the lottery system to options on NASDAQ NMS securities might result in the allocation of NASDAQ options stocks among the exchanges and the NASD, the NASDAQ Options Program might receive an insufficient number of underlying securities to justify the cost of developing options related automated systems.

      Of equal concern to the Board and NASDAQ issuers is the fact that under existing allocation procedures, issuers of underlying securities cannot choose whether options should be traded on their stocks nor, if they are, the market in which such options should be traded.

      The Board believes that NASDAQ issuers should have the right to determine whether options are traded on their securities and should be able to choose their market of preference.

      The Board therefore urges members in their comments to the Commission on the enclosed release to support the position that NASDAQ options should be traded in the NASDAQ market subject to issuer approval and should not be allocated to the exchanges under existing lottery procedures.

      NASDAQ Options Systems

      The automatic execution system for NASDAQ options ("NOAES") and the locked-in trade feature, ("OCT") will, in the Board's view, greatly increase the efficiency of executions, reconciliation, clearing and surveillance in the NASDAQ options market.

      For these reasons, the Board urges members to support the trading systems proposed for the NASDAQ Options Program in their comments on the Commission's release.

      Surveillance

      In determining whether to move forward with the NASDAQ Options Program, the Board carefully considered the fact that any adverse consequences of stock/options manipulations involving NASDAQ options might far outweigh any benefits flowing to members and the investing public created by options trading.

      The locked-in trade features of NOAES and OCT, together with the NASD's ability to capture and retain all quotations entered into the system, will create a complete record of NASDAQ options transactions, permitting the NASD to compare transaction reports with market maker quotation changes to determine if frontrunning and other abuses have occured.

      Another key element of the integrated surveillance system will be an audit trail for equities underlying NASDAQ options which is currently under development.

      A document entitled A Discussion of the NASDAQ Options Surveillance Program was filed with the SEC on December 22, 1983, and will be provided to members by the Association upon request.

      The Board views integrated stock/options surveillance as an essential ingredient for investor protection under any program which would propose to trade options on NASDAQ securities.

      Therefore, the Board asks members in comments on the Commission's release to request that the Commission not approve any proposal to trade NASDAQ options until the NASD's surveillance systems and related equity audit trail are in place.

      * * * *

      Please note that the deadline for comments is June 15, 1984. Letters to the SEC should include reference to File No. SR-NASD 80-10 and should be addressed as follows:

      George A. Fitzsimmons, Secretary
      Securities and Exchange Commission
      450 Fifth Street, N.W.
      Washington, D.C. 20549

      The Association would appreciate receiving copies of letters sent to the Commission. Please address such correspondence to:

      Peter T. Canada
      Assistant Director, NASDAQ Operations
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C. 20006

      Members who wish to obtain additional materials or information concerning the NASDAQ Options Program or the SEC's release may do so by contacting Mr. Canada at (202) 728-8479.

      Sincerely,

      Gordon S. Mackin
      president

      Attachments

      THE NASDAQ OPTIONS PLAN: AN OVERVIEW

      INTRODUCTION

      The National Association of Securities Dealers, Inc. (the "NASD" or "Association"), has developed a program for the quotation display of put and call options written on certain designated NASDAQ securities and indexes. For purposes of this program, the securities upon which NASDAQ options will be written will be chosen from those which are designated as National Market System (NMS) securities pursuant to Securities and Exchange Commission (SEC) Rule HAa2-l and certain exchange-listed securities which are trading pursuant to Rule 19c-3. In addition, certain NASDAQ and NMS indexes will be utilized for cash settled index options, including the NASDAQ composite index and sub-indexes such as the NMS industrial index.

      The options eligible for NASDAQ display ("NASDAQ options") will be selected in accordance with criteria established by the NASD, the Options Clearing Corporation (OCC) and the Securities and Exchange Commission. As is the case with options listed on the various exchanges, OCC will act as the issuer of all NASDAQ options including NASDAQ index options. Rules which are applicable to NASDAQ options will also apply to NASDAQ index options, except where stated.

      Standardized as to exercise price, expiration date, and unit of trading in accordance with NASD and OCC rules, continuous markets for NASDAQ options will be maintained by qualified NASDAQ options market makers registered as such with the NASD. In that connection, an essential element of the NASDAQ Options Program will be the ability of certain market makers in NASDAQ securities to make markets simultaneously in NASDAQ options written on those securities. This practice, referred to as "side-by-side" or "integrated" market making, will be permitted under very carefully supervised, rigorously surveilled conditions providing appropriate regulatory safeguards.

      NASDAQ options will be registered under the Securities Act of 1933 and in the various states by OCC. Covered by OCC's prospectus and a risk disclosure document meeting the requirements of Rule 9b-l of the Securities Exchange Act of 1934, as amended, each NASDAQ option will be exercisable through OCC, which will also serve as the obligor of all NASDAQ options.

      In order to utilize the services and facilities of OCC, the NASD will acquire OCC stock subsequent to its plan being filed with and approved by the Securities and Exchange Commission and following the approval of such stock acquisition by OCC's Board of Directors and its existing participant owners.

      In structuring the NASDAQ Options Program, the NASD determined to preserve the essential elements of a competitive dealer market and to incorporate standards comparable to those applied to exchange-traded options, including rules and regulations governing members' trading and sales practices. Included among these are a provision for the last sale price reporting of completed transactions in NASDAQ options contracts to the Options Price Reporting Authority (OPRA). In this connection, an automated execution system and other automated features are being designed for the NASDAQ Options Program. These features, which are discussed below, will create "locked-in" trades for price reporting and clearing purposes and advanced, automated market surveillance capabilities for NASDAQ options.

      The NASDAQ Options Automated Execution System ("NOAES") is being designed to provide automated executions of options trades. Initially, this system will provide for automatic executions for trades up to three (3) contracts. NOAES will facilitate execution of such options trades against the best bids or offers for options in the system on a preferenced or non-preferenced basis. Only customer orders will be subject to automatic executions. NOAES will provide for "locked-in" trades and automatic confirmation of trades to both parties and reporting of trades to OPRA. In addition, NOAES will capture clearing data for timely submission to OCC at the end of the trading day.

      In addition to automated execution of small orders, NOAES will also provide for a new transaction, the Order Confirmation Transaction ("OCT"). In this mode, transactions in options will take place along conventional lines, i.e., negotiated via the telephone. Immediately thereafter, the "seller" will enter the trade detail into his NASDAQ terminal and the message will be routed to the contraparty. When an OCT is entered into NOAES and the entry is accepted by the contra-party, both parties will have the advantages of the "locked-in trade" and the reporting features of NOAES. The OCT mode will be utilized by the options participants to execute and/or report negotiated trades not subject to an automatic execution.

      All NASDAQ options transactions will be required to be executed or reported via NOAES. Therefore, all trades in NASDAQ options will be either automatic executions or negotiated transactions which are affirmatively accepted by both parties through an OCT. In either event, option trades will be "locked-in" for clearing purposes. For this reason, an options trade comparison processor for NASDAQ options will not be needed and awkward, inefficient and costly procedures associated with the reconciliation of options transactions will be eliminated.

      UNDERLYING SECURITIES

      The selection of the underlying securities eligible to be subject to NASDAQ options will be governed by the Association in accordance with established requirements.

      Prior to securities being authorized by the Association as underlying securities for NASDAQ options, the issuer of the underlying security will be given the opportunity to approve or disapprove the use of its securities for options purposes.

      The Association's eligibility criteria, designed to demonstrate and assure that each underlying issue meets the maxim of being "widely held and actively traded," will conform to the standards approved by the SEC and presently in force among OCC and its participant exchange owners. The NASDAQ Options Program will, of course, permit the writing of options on underlying issues traded in the NASDAQ National Market System (NMS). As of May 4, 1984, 872 NASDAQ securities were traded in the National Market System.

      In addition to being NMS designated, issuers of underlying securities must be registered under the Securities Exchange Act of 1934 and subject to certain reporting and disclosure requirements of the Exchange Act, unless specifically exempted therefrom by the SEC. Further, the underlying securities must satisfy the following additional requirements which are identical to those to those of the options exchanges for underlying listed issues; a 7,000,000 share public float, a price per share of $10, cummulative net earnings of $1,000,000 for the preceding eight quarters, 6,000 beneficial shareholders, an annual trading volume of 2.4 million shares and no defaults by the issuer in the preceding year.

      The Association also has established minimum requirements as maintenance standards for the continued approval of underlying securities previously selected for NASDAQ options. These standards conform to those approved by the SEC and adopted by the various exchanges.

      There are currently 253 NASDAQ NMS issues named in the Association's options filing with the Securities and Exchange Commission. Of these securities, the Association has identified 94 issues which it believes would be suitable for inclusion in the NASDAQ Options Program during its initial phase.

      NASDAQ OPTIONS CONTRACTS

      The Association will establish classes of options (that is, all options contracts of the same type in the same underlying security) eligible for NASDAQ display. Within each class of options, there will be three or more series of options contracts. A series of options will include all options in an underlying security having the same exercise price, expiration date and unit of trading. A unit of trading for each NASDAQ option contract relating to common stock will cover 100 shares of the underlying security. The unit of trading for NASDAQ index options will be the stated value of the underlying index multiplied by an index multiplier specified by the Association. The Association currently intends to utilize an index multiplier of $10 for all NASDAQ index options. The expiration dates or cycles for NASDAQ options will be set at three, six and nine month intervals.

      The exercise prices of NASDAQ options will be set at prices which are reasonably close to the market price of the underlying security or the most recent computation of the underlying index at the time a series is opened for display on the NASDAQ System.

      A new series of options could be opened with the same expiration date but with a different exercise price to reflect price movements in the underlying security. Presently, it is contemplated that the exercise prices of NASDAQ options will be fixed at five-dollar intervals for underlying securities trading below $100 and ten-dollar intervals for underlying securities trading at or above $100. NASDAQ index options will have five point strike price intervals. By way of example, assume that options in XYZ are authorized by the Association in April for display on NASDAQ at a time when the last reported sale in XYZ securities is $52. The Association will authorize series of call options having strike (exercise) prices of $50 and $55. Such options will expire in July, October and January. If the bid in XYZ securities moved to 55 1/8, additional series of options would be established with strike prices of $60 and with similar expiration cycles.

      NASDAQ OPTIONS QUOTATIONS SYSTEM

      The NASDAQ System will be technically modified to accommodate the display of NASDAQ options. Once modified, the NASDAQ options quotation system and the present NASDAQ securities quotation system will be substantially the same. Accordingly, the three levels of service described below will provide for similar registration, updating and retrieval techniques.

      • Level 1 terminals will provide up-to-the-minute last-sale reports for each NASDAQ option.
      • Level 2 terminals will display each NASDAQ option and list each registered options market maker with its most recently entered quotations, in addition to the last reported sales prices for both the option and its underlying security, daily high and low, daily volume, time of last sale and inside quotations.
      • Level 3 terminals will provide registered NASDAQ options market makers with the ability to enter or update quotations in a particular NASDAQ option.

      The NASDAQ System will provide for the last-sale price reporting of completed transactions in NASDAQ options contracts. The Association will interface with the Consolidated Options Tape administered by OPRA and last sale trade price information in NASDAQ options will be transmitted to OPRA and distributed by OPRA over the OPRA Tape. Last-sale reports for transactions which are automatically executed will be simultaneously and automatically reported to OPRA. Last sale price reports for OCT transactions will be reported at the time the OCT message is entered. The party currently responsible for NMS trade reporting, normally the seller, will have the responsibility for entering OCT's into the system.

      NASDAQ OPTIONS AUTOMATED EXECUTION SYSTEM (NOAES)

      As noted, the Association's proposed Options Program will provide for the automatic execution of orders in stock options and index options as an integral part of the service. The system will automatically execute entered trades creating a "locked-in trade" by reporting the trade to OPRA, forwarding confirmations to both sides of the execution, and producing clearing data and forwarding such to OCC.

      This capability will be limited to small customer orders and will function in a manner which is similar to the Association's proposed Small Order Execution System ("SOES"). Additionally, a new transaction, the Order Confirmation Transaction, will permit trades which are not automatically executed to be captured by the system. When this type of transaction is entered into the system and the entry is accepted by the contra-party, both parties will have the advantage of a "locked-in" trade and the reporting features of the automatic execution system. The following describes, in general terms, features of the NASDAQ Options Automatic Execution System.

      The NASDAQ Options Automatic Execution System will automatically execute orders in NASDAQ stock and index options. The system will permit the execution of orders initially for up to three (3) contracts in any NASDAQ stock or index option. NOAES orders will be executed against only one market maker and may be preferenced or non-preferenced. Preferenced market makers will receive a NOAES execution only if such market maker has the best displayed quotation. Non-preferenced orders will be executed on a rotating basis against market makers displaying the best NOAES quotation.

      Participation in NOAES will be mandatory for all options market makers. Therefore, all NASDAQ options quotations displayed will reflect prices at which automatic executions may be effected. The automatic execution system will thus able to automatically execute transactions at the "best" displayed NASDAQ option bid or offer.

      NOAES market makers may set exposure limits on individual option series which may be changed on-line during the trading day. When a market maker's exposure limit is exhausted, the market maker's quotations will be deleted from NOAES. However, the market maker's symbol identification will continue to be displayed.

      In the event that there is only one market maker at the best NOAES bid or offer and such market maker's exposure limit is exhausted, the next best remaining quotation will automatically become the new best bid or offer for purposes of automatic executions.

      In the event all market makers' exposure limits in a particular option are exhausted, NOAES will display the bid and offer of the last market maker whose exposure limit was exhausted and automatic executions will continue on a rotating basis among all registered market makers in the option at that price until new quotations and/or exposure limits are entered into NOAES by affected market makers.

      ORDER CONFIRMATION TRANSACTIONS (OCT)

      The Order Confirmation Transaction will allow an order entry firm to contact a NASDAQ options market maker via telephone and negotiate a trade which is not subject to an automated execution. The "sell" side of such transaction will then be required to enter an OCT message into the system within 90 seconds. Fields will be provided in the OCT to indicate information to be reported to the OPRA Tape and the trade will be reported to OPRA upon the entry of the OCT. The party receiving the confirmation message via the system will be given a time limit of 90 seconds in which to accept the message which will provide all the fields of trade information required to be "locked-in" for clearing purposes. If the message is accepted, the transaction becomes a "locked-in" trade to be reported to OCC at the end of the trading day. In the event a member fails to respond to an OCT message, such message will be retained in NOAES for reconciliation at the close of the trading day. The OTC feature combined with the automatic execution system will permit both large and small orders to become "locked-in" trades.

      SIDE-BY-SIDE MARKET MAKING

      Secondary markets for NASDAQ options will be maintained in a manner comparable to the secondary markets for NASDAQ equity securities. Market makers, qualified and registered with the Association specifically for NASDAQ options, will create and maintain over-the-counter markets in NASDAQ options. They will purchase and sell (write) for their own accounts and maintain inventories in the NASDAQ options in which they make a market. Thus, a firm having a customer's order to buy or sell a NASDAQ option, whether acting as a broker or dealer, will go to a market maker to make the purchase or sale.

      An essential element of the NASDAQ Options Program will be the ability of market makers in underlying securities quoted on the NASDAQ System to make markets simultaneously in NASDAQ options written on those securities. Such side-by-side market making was approved in principle by the Securities and Exchange Commission on September 24, 1976. In giving its approval, the Commission stated, in part, that:

      ". . . an options program along the lines discussed in the NASD's analysis would be consistent with the Securities Exchange Act of 1934 and that, in an environment of vigorous competitive market making, it would be appropriate to permit market makers, if they choose, to make markets in both the options and the underlying securities. In reaching that conclusion, the Commission recognized that the market operated through the NASDAQ System is relatively free of anti-competitive restraints and should therefore provide an opportunity to test the extent to which competition can be an effective regulator of a unified market for options and their underlying securities." 1/

      The Commission went on to express concern over the environment in which side-by-side trading may be permitted, wishing to be certain ". . . that environment provides for appropriate regulatory safeguards." 2/

      In connection with and in response to these concerns, the Association's rules will impose specific requirements on side-by-side market makers who will also be bound by rules which are applicable to all members. The special rules applying to side-by-side market makers are as follows:

      • In order for a member to make a market simultaneously in an underlying security and the options relating thereto, there will have to be a total of at least ten (10) registered market makers in such underlying security and at least five (5) registered market makers in each option group in respect to which side-by-side market making is intended.
      • Side-by-side market makers will be required to report information with respect to transactions and positions in conventional, over-the-counter options covering those securities in which NASDAQ options markets are being made.
      • In effecting a NASDAQ option transaction with or for a customer, a side-by-side market maker will be required to disclose such function on the confirmation sent to the customer.
      • Once side-by-side market making has begun, permission for further side-by-side market making in new options series will be withdrawn if there are fewer than seven (7) registered NASDAQ market makers displaying quotations on the NASDAQ System in the underlying security or there are fewer than three (3) registered NASDAQ options market makers displaying quotations on the NASDAQ System in the NASDAQ options group. Whenever the Association withdraws its approval for side-by-side trading in a particular options series, it will not reinstate side-by-side trading until there are again ten (10) market makers in the underlying security and five (5) in the option series.

      The Association's plan will permit side-by-side market making only by members who agree to be "primary" market makers. "Primary market makers" will be those members who register as such with the Association and agree to be subject to the commitment and penalty rules discussed below.

      Primary market makers will be obligated, upon undertaking this designation, to continuously quote all options in their primary markets through the completion of all expiration cycles which are open for trading in such markets at the time the member's registration as a primary market maker becomes effective. Such obligation will also apply to any new option series added in those expiration cycles during the term of the market maker's commitment. Thus, a member becoming a primary market maker in XYZ options at the expiration of the October options will be required to remain in the market through the expirations of all January, April and July XYZ options, a period of approximately nine months.

      Further, should the primary market maker elect to commence quotations in options series in a subsequent expiration cycle, the market maker's commitment to continuously quote options will extend through the expiration of such options. This will extend the market maker's commitment for three additional months.

      Thus, in the above-referenced example, if the primary market maker in XYZ options commences quotations in new October XYZ options upon the commencement of trading in these options in January, the member will be obligated to quote all XYZ options in the October expiration cycle until the end of that expiration cycle, i.e., for a period of nine months.

      Any primary market maker failing to abide by these commitments will have its market maker registration revoked and will not be permitted to re-register as an options market maker in such options until the expiration of both the near term expiration cycle and the expiration cycle which follows. Thus, a primary market maker in XYZ options withdrawing quotations from the NASDAQ System for any open XYZ option contract in, say, September, will have its registration as a market maker in XYZ options terminated and will not be permitted to re-register as a market maker in XYZ options until the expiration of the January options.

      In addition to the above-referenced penalties, primary market makers failing to abide by the commitment rules could have their market maker registration in the underlying security revoked for a period of time, subject to disciplinary procedures which will offer rights of due process to the member. In addition, primary market makers whose quotations are withdrawn during the fifteen (15) business days preceding the expiration of an option series may be found in violation of Article III, Section 1 of the Association's Rules of Fair Practice which obligates members to act in accordance with high standards of commercial honor and just and equitable principles of trade. The application of Article III, Section 1 in such situations will, of course, follow Association procedures providing members with due process and rights of appeal.

      Other specialized rules have been developed to govern NASDAQ options trading, not only by side-by-side market makers, but also by other market makers, retail firms and their customers as well. These rules are comparable to the standards presently applied to options trading on the various exchanges. They are intended to prevent manipulative abuses in NASDAQ options and their underlying securities and to assist in the detection of manipulative activities. These rules include the following:

      • Position Limits
      • Exercise Limits
      • Liquidation of Positions in Excess of Position/Exercise Limits
      • Limits on Uncovered Short Positions
      • Restrictions on Options Transactions and Exercises
      • Reporting of Options Positions

      MARKET AND MEMBER SURVEILLANCE

      A key feature of the NASDAQ Options Program will be the unified surveillance and regulation of the trading markets for both NASDAQ options and their underlying NASDAQ equity securities. This simultaneous surveillance and regulation will be performed by the Association's Market Surveillance Section in a manner comparable to that in which NASDAQ equity securities are presently surveilled.

      The locked-in trade features of NOAES will provide an unimpeachable audit trail for options transactions when NOAES trade data is integrated with clearing data. Thus, the Association will be able to capture and analyze all trade data for options in addition to all quotations and quotation changes.

      An equity audit trail will be implemented which will allow the NASD to reconstruct transactions in underlying equities as well. The audit trail will be augmented by the SOES system which will create a significant volume of "locked-in" trades in underlying stocks.

      From quotation and last-sale data for options and their underlying equity securities, a series of daily computerized reports will be produced by the NASDAQ System. The information on these reports will be displayed in such a way as to facilitate the review by a market surveillance analyst of every transaction and/or quotation for an option and its underlying security, particularly those which exceed pre-established parameters.

      In addition to the reports produced in-house, the Market Surveillance Section will receive for review various reports produced by OCC and the National Securities Clearing Corporation (NSCC). From time to time, it will also receive various reports from members concerning options positions in various types of accounts. By means of these reports, the Association will have the capability to conduct a thorough and comprehensive monitoring of trading in both NASDAQ options and their underlying securities and to perform such surveillance on a comparative basis.

      The comparative surveillance procedures developed by the Association will aid in the prompt and early detection of fraudulent activities in a NASDAQ option or its underlying security from quotation on the NASDAQ System. Because markets for options and underlying securities will be integrated, the problems of inter-market surveillance of options and underlying securities will be eliminated.

      OPTIONS COMMITTEE AND BOARD OF GOVERNORS OVERSIGHT

      Subsequent to the commencement of NASDAQ options trading, the Options Committee together with the Association's Board of Governors will closely monitor the operation of the NASDAQ Options Program and the initial package of specialized options rules as adopted. Based on such review and as deemed appropriate, alteration, amendment, supplementation or abrogation of certain rules will be made and filed with the Securities and Exchange Commission for its approval.

      * * * *

      NASDAQ OPTIONS FACT SHEET

      The NASDAQ Options Program will provide quotation, execution, trade reporting and comparison facilities necessary for NASDAQ market makers to trade standardized put and call options on NASDAQ NMS securities and indexes in the over-the-counter market. The Program will also provide for comprehensive regulation of the NASDAQ options market and unified surveillance of markets for NASDAQ options and underlying equities.

      Underlying Securities

      The NASDAQ Options Program will permit registered options market makers to trade options on approved NASDAQ NMS securities. The selection criteria for these underlying securities, which are identical to those of the options exchanges, are:

      • Annual trading volume of 2.4 million shares
      • Public float of 7 million shares
      • Price of $10 per share
      • 6,000 beneficial shareholders
      • Cummulative earnings of $1,000,000 for eight quarters preceding authorization
      • No defaults by the issuer in the 12 months preceding authorization

      Prior to the commencement of trading in options on eligible securities the issuer would have the right to approve the use of its securities for options.

      NASDAQ Options

      NASDAQ options will be standardized as to strike price and expiration. Expirations will be at three, six and nine month intervals and strike prices will be established in the same manner as listed options.

      NASDAQ options will be issued by the Options Clearing Corporation ("OCC") and subject to OCC rules relating to their exercise and settlement.

      Market Making in NASDAQ Options

      Market makers in NASDAQ options will quote firm, continuous markets in options via NASDAQ. The NASDAQ system will be modified to permit market makers to enter and update options quotations through the system. Inside quotations will be disseminated to subscribers, the Options Price Reporting Authority ("OPRA"), vendors and wire services.

      Integrated Market Making

      Subject to special registration requirements and rigorous surveillance, members will be permitted to make markets simultaneously in both options and underlying securities, a practice referred to as "integrated" or "side-by-side" market making.

      As a pre-requisite for side-by-side market making, there must be at least ten registered market makers in the underlying security and five market makers in related options. Integrated market making will not be permitted in new options series if the number of market makers in the stock and related options falls below seven and three, respectively. As NASDAQ options will be permitted only on the largest, most active underlying issues, dealer competition in the trading of these securities will deter abuses in the integrated trading of stocks and options.

      Members who wish to make side-by-side markets must agree to continuously quote all options series through three expiration cycles, a period of approximately nine months. Members agreeing to the commitment rules are referred to as "primary" market makers.

      If the primary market maker commences quotations in an options series subsequent to the initial three cycle commitment, the market makers' commitments will be extended through the expiration of that series.

      Members who violate the above-referenced commitment rules may have their registration in an option suspended through the expiration of both the near-term options and the expiration cycle which follows. In addition, primary market makers violating the commitment rule may have their market maker registration in the underlying security suspended for up to 30 days. Unexcused absences from the system by primary options market makers during the fifteen business days preceding the expiration of an option series may result additional disciplinary actions against the member. The commitment rules will assure continuous, liquid markets for NASDAQ options.

      Systems for NASDAQ Options

      Advanced systems are being designed for NASDAQ options trading. In addition to modification to the quotation system to accommodate options, the NASDAQ Options Program will include an automated execution system for small customer orders and "locked-in" trades for larger transactions.

      NASDAQ Options Automatic Execution System ("NOAES")

      All NASDAQ options market makers will be required to participate in NOAES, which will provide for automatic executions of agency trades of up to three contracts in all NASDAQ options. NOAES will be the first automatic execution system of its kind for options.

      Orders routed to the automatic execution system may be preferenced or non-preferenced. Preferenced orders will be executed against the preferenced market maker if that member has the best displayed NOAES quotation. Non-preferenced orders will be executed on a rotating basis against those market makers having the best displayed quotation.

      Market makers will be permitted to set exposure limits on the number of automatic executions they will accept at their NOAES quotation. Once a market maker's exposure limit is exhausted, the member's quotes will be deleted from NOAES and the member will be taken out of the NOAES rotation until new exposure limits are entered. Such market maker's symbol identification will, however, continue to be displayed.

      Automatic executions via NOAES will automatically generate contra-broker confirmations, trade reports and clearing information.

      Order Confirmation Transactions ("OCT")

      The OCT will permit principal transactions and orders exceeding three contract size to be "locked-in" for clearing and reporting purposes.

      OCT's will be negotiated via telephone in the traditional manner. Within 90 seconds thereafter, trade detail will be entered into a NASDAQ terminal by the member who would be responsible for NMS trade reporting. The OCT entry will immediately generate a trade report.

      The OCT message will then be transmitted to the contra-party. Upon acceptance of the OCT message by terminal entry, the trade will be locked-in for clearing purposes and confirmations to both parties will be automatically generated.

      OCT messages which are not accepted within 90 seconds will be retained in the system for subsequent confirmation. The OCT facility will also be available after the close of trading for corrections and reconciliation of unconfirmed messages. Because all transactions in NASDAQ options will be locked-in by OCT or by automatic executions, the costly and inefficient procedures normally associated with the over-night settlement of options transactions will be eliminated.

      Market Surveillance

      The locked-in trade features of NOAES and OCT, together with the NASD's ability to capture and retain all quotations entered into the system, will create a complete record of NASDAQ options transactions, permitting the NASD to compare transaction reports with market maker quotation changes to determine if frontrunning and other abuses have occured.

      To compliment its surveillance of the NASDAQ Options Program, the NASD will implement an audit trail for underlying equities which will integrate trade and clearing data, thus enabling the NASD to identify contra-brokers representing agency orders and to reconstruct trading activity through automated reports.

      The NASDAQ options and equity audit trail data will be merged into automated surveillance reports which will enable the Association to readily detect stock/options manipulations, frontrunning and other potential abuses associated with options trading. The unified surveillance of markets for both NASDAQ options and underlying securities utilizing highly automated systems augumented by field surveillance will advance NASDAQ options surveillance procedures because one regulatory organization, the NASD, will have oversight responsibilities for both options and underlying equity markets.

      * * * *

      SECURITIES AND EXCHANGE COMMISSION

      [Release No. 34-20853; File Nos. SR-NASD-80-10; Amex-83-33; CBOE-83-53; NYSE-84-4; PSE-84-2; and Phlx-83-27]

      Over-the-Counter Trading of Standardized Options and Exchange Trading of Options on Over-the-Counter Securities

      ACTION: Extension of comment period and request for additional comments.

      SUMMARY: The Commission has published notice of proposed rule changes submitted by the National Association of Securities Dealers, Inc. and five Securities exchanges to trade options on over-the-counter securities. In view of the significant issues raised by these proposals, the Commission has determined. to extend to June 15, 1984, the period for public comment on the proposals and to solicit additional written submissions of data, views and comments from interested persons, particularly with respect to the issues discussed in this release.

      DATES: Comments should be received by June 15, 1984.

      ADDRESSES: Interested persons should submit 15 copies of their views and comments to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 450 Fifth Street N.W., Washington, DC 20549, and should refer to File Nos. SR-NASD-80-10 or Amex-83-33, CBOE-83-53, NYSE-84-4, PSE-84-4, or Phlx-83-27, as appropriate. All submissions will be made available for public inspection at the Commission's Public Reference Room.

      FOR FURTHER INFORMATION CONTACT:

      Alden Adkins or Sharon D. Lawson, Division of Market Regulation, 450 Fifth Street N.W., Washington, DC 20549, (202-272-2843 and 202-272-2855).

      SUPPLEMENTARY INFORMATION: .

      I. Introduction

      On June 12, 1960, the National Association of Securities Dealers, Inc. ("NASD") pursuant to Section 19(b)(l) of the Securities Exchange Act of 1934 (the "Act") submitted to the Commission a proposed rule change to establish an over-the-counter ("OTC") market in standardized put and call options on certain individual securities.1 On June 28,19C2. the NASD submitted to the Commission Amendment No. 1 to this proposed rule change. Amendment No. 1. among other things, proposed to establish an OTC market in standardized put and call options on certain stock indices.2 On December 1, 1982, the NASD submitted to the Commission Amendment No. 2 to the proposed rule change. Amendment No. 2 provided for the OTC trading of additional stock indices.3 In addition, on December 22, 1983, the NASD submitted to the Commission several documents describing the proposed rule change, as amended; proposing certain changes to the proposal; and discussing certain issues raised in previous comments on the proposal.4

      From November 1983 to February 1984. the Chicago Board Options Exchange, Incorporated ("CBOE"); American Stock Exchange, Inc. ("Amex"); Pacific Stock Exchange, Inc. ("PSE"); Philadelphia Stock Exchange. Inc. ("Phix"), and New York Stock Exchange, Inc. ("NYSE") filed with the Commission pursuant to Section 19(b)(l) of the Act proposed rule changes to permit the listing and exchange trading of standardized options on securities that are not listed and registered on a national securities exchange under Section 12(a) of the Act ("OTC securities") but are designated as national market system securities under Rule HAa2-l(b)(l) under the Act ("NASDAO/NMS Tier I securities").5 In connection with their proposed rule changes, the CBOE, Phlx and PSE have requested that the Commission amend Rule 12a-6 under the Act, which effectively bars exchange trading of options on OTC securities.6 In a separate release the Commission has proposed amendments to Rule 12a-6.7 Those amendments, if approved, would remove the Rule's effective ban on exchange trading of options on OTC securities; Commission approval of those amendments would not, however, authorize any exchange to list and trade such options. Authorization of the actual exchange trading of options on OTC securities can be provided only by Commission approval of the exchanges' proposals described and discussed in this release.

      In this release, the Commission describes the NASD proposal and the proposals submitted by the exchanges to list and trade options on NASDAQ/NMS Tier I securities. The purpose of this release is to extend the comment period on these proposals to June 15, 1984, and to solicit additional written submissions of data, views and comment regarding these proposals.

      II. The NASD Proposal

      A. Overview

      The NASD proposes to display quotations in standardized put and call options on designated stocks ("NASDAQ options") and stock indices ("NASDAQ index options"). These quotations, to be displayed in the NASD's NASDAQ System, would be made by options market makers registered as such with the NASD. The options would be standardized as to exercise price, expiration date, and unit of trading, and would be registered with the Commission under the Securities Act of 1933 and in various states by the Options Clearing Corporation {"OCC"). NASDAQ options and index options would be exercisable through OCC, which would serve as issuer and guarantor of these options. The NASD proposal includes a provision for last sale reporting of completed transactions in NASDAQ options and index options contracts. In addition, the NASD proposes to establish an automated small customer order (three contracts or less) NASDAQ options execution system, and an "order confirmation transaction" feature that will "lock in" customer trades for more than three contracts in NASDAQ options and index options for price reporting, surveillance and clearing purposes. The NASD proposes to allow one entity to make markets contemporaneously in both NASDAQ options and their underlying securities, so long as certain conditions are satisfied. In addition, the NASD proposes to implement special surveillance measures to monitor trading in its proposed options.

      B. Specific Features of the NASD Proposal

      1. Eligible Underlying Securities. To be eligible to underlie a NASDAQ option, a security must be (a) a designated national market system ) security under Rule 11Aa2-l of the Act, (b) displayed on the NASDAQ system and (c) either registered with the Commission under Section 12(g)(l) of the Act or issued by an insurance company meeting the conditions of Section 12(g)(2)(G) of the Act.8

      The security must also satisfy certain criteria identical to those established by exchanges for stocks underlying individual stock options;9 and the issuer of the security must consent to the inclusion of that security in the NASDAQ option program.10

      2. Proposed NASDAQ Options Automated Execution System. The proposed NASDAQ Options Automatic Execution System ("NOAES") would automatically execute orders in NASDAQ stock and index options. This system would permit the automatic execution at the best NASDAQ displayed bid or offer of customer orders for up to three contracts. Participation in NOAES for a particular NASDAQ options class would be mandatory for all NASDAQ market makers in that option. All NASDAQ options quotations displayed, therefore, will reflect prices at which automatic executions may be effected. Each market maker will be able to enter I "exposure limits" that act to specify the ' maximum number of contracts that the firm will be willing to buy or sell via automatic execution. Until the exposure limit is exhausted, however (i.e.. reaches zero) the market maker must accept one automatic execution for op to three contracts at his stated quotation if such quotation is the best quotation in the system.

      If more than one market maker is displaying the best bid or offer, orders entered without designating a preferenced market maker will be automatically executed on a rotating basis against each market maker at that price. Preferenced orders, i.e., ones designating a particular market maker, would also be allowed. A preferenced order will be executed against the preferenced market maker if his quote is equal to the best NOAES price and .his exposure limit has not been exhausted. A firm would not be allowed to designate itself as the preferenced market maker. If the preferenced order cannot be executed against the preferenced market maker, the system will execute against the next market maker in the rotation at the best NOAES price.

      The NOAES system will also permit the entry of preferenced pre-opening orders. Preferenced orders entered before the NOAES opening (which will occur at approximately 10:00 a.m., subject to the opening of trading in the underlying security) will be stored in the system and, if executed, will be executed at the best NOAES opening price. Each NOAES market maker will also be given the opportunity to decide how many of the pre-opening orders preferenced to him he wishes to accept for automatic execution at the best NOAES opening price. In the event a participating market maker elects not to accept for automatic execution all pre-opening orders preferenced to him, those orders will be retained in the NOAES system and executed automatically after the opening on a rotating basis against other NOAES market makers.

      The NOAES system will automatically forward trade data from execution reports to the Options Price Reporting Authority ("OPRA") for dissemination to the distribution vendors. In addition, NOAES will forward to the clearing facility execution reports for both sides of the trade, resulting in a "locked-in" trade for clearing purposes.

      3. NASDAQ Options Orders Not Automatically Executed. Under the NASD proposal, use of NOAES for small customer orders is voluntary and, as noted above, the system may not be used for orders larger than three contracts. Under the NASD proposal, there would be established an order confirmation transaction ("OCT") feature by which these orders would be reported. The order entry firm would contact a NASDAQ options market maker by phone and negotiate a trade. The "sell" side of the transaction would then be required to enter into the NASDAQ System an OCT message within 90 seconds. The trade will be reported to OPRA upon entry of the OCT message. The "buy" side of the transaction will have 90 seconds in which to accept the message.

      If the message is accepted, the transaction becomes a "locked-in" trade to be reported to OCC at the end of the trading day. If a member fails to respond to an OCT message, the message will be retained in NOAES for reconciliation at the close of the trading day. All OCT messages, whether accepted or not, would be captured by the system.

      Each side to a transaction would also be able to "break" the trade by mutual agreement in the event an incorrect OCT message is inadvertently accepted by the contra-party. Such "broken" trades will also be captured by the system.

      4. Side-by-Side or Integrated Market Making. Under the NASD proposal, market makers in securities underlying NASDAQ options would be able to make markets simultaneously in NASDAQ options to those securities. The NASD proposes to impose specific requirements on these "side-by-side" market makers who, in addition, would be bound by rules applicable to all members. The specific rules that would apply to side-by-side market makers are as follows:
      (1) In order for a member to make a market simultaneously in an underlying security and the options relating to that security, there would have to be at least 10 registered market makers in the underlying security and at least 5 registered market makers in each option group 11 in respect to which side-by-side market making is intended.
      (2) Once begun, side-by-side market making in new options series would not be allowed if there were fewer than 7 registered NASDAQ market makers displaying quotations on the NASDAQ system in the underlying security or fewer than 3 registered NASDAQ options market makers displaying quotations on the NASDAQ system in the NASDAQ options group. Side-by-Side market making would not be allowed until there were again 10 market makers in the underlying security and 5 in the options group.
      (3) Side-by-side market makers would be obligated to quote continuously markets for all options series in which they were also making markets in the underlying security through the completion of all expiration cycles open for trading when the market maker started side-by-side market making. Should a Side-by-side market maker elect to commence quotations in options series in a subsequent expiration cycle, the market maker's continuous quotation obligation would extend through the expiration of the cycle. If any side-by-side market maker failed to abide by this commitment, his registration as an options market maker in the options group would be revoked and he would not be permitted to re register as a market maker in such options until the expiration of both the near term expiration cycle and the expiration cycle which follows:12
      (4) Side-by-side market makers would be required to report information with respect to transactions and positions in conventional, over-the-counter options covering those securities in which NASDAQ options markets were being made.
      (5) In effecting a NASDAQ options transaction with or for a customer, a side-by-side market maker would be required to disclose such function on the confirmation sent to the customer.
      5. Other Options Rules. The proposed NASDAQ options rules incorporate a number of other provisions contained in exchange rules covering standardized options on individual stocks. These include rules establishing position and exercise limits (2,500 or 4,000 contracts, identical to those used by the options exchanges]; authorizing the NASD to impose limitations on the total number of uncovered short positions in a given class of options; authorizing the NASD to impose limitations on transactions in. or exercises of, one or more series of options in the interest of fair and orderly markets for options or their underlying securities; prohibiting market makers from entering into any options contract with the issuer, or any controlling person or affiliate of the issuer if the option covers securities of the issuer; and requiring reports concerning each account (member, associated person or customer) having an aggregate position of 200 or more options contracts on the same side of the market.
      The NASD also proposes to apply to trading in NASDAQ options the same prohibitions against fictitious and prearranged trades, manipulation, and front-running as currently apply to exchange trading in options.
      6. NASDAQ Index Options. The NASD also proposes to trade options on stock indices. The proposal contains two broad or market indices—a NASDAQ composite index, to be comprised of all NASDAQ stocks, and an NASDAQ NMS composite index, to be comprised of all NMS stocks. The NASD also proposes six sub-indices of each of these two broad indices. The NASD has not yet specified the stocks that would be included in these sub-indices, nor has it indicated how these indices would be calculated.
      The NASDAQ index options would be cash-settled. Market makers in these index options would be registered as such with the NASD. The NASD has proposed to apply to NASDAQ index options margin requirements that are identical to those applied to exchange-traded index options.13 The NASD has not yet specified in its rule filing the specific obligations of index options market makers, or position and exercise limits for NASDAQ index options.
      7. Surveillance. The NASD states that it intends to implement a fully automated options trail that would include the following: locked-in options transaction information including class, series, price, size, time, buyer and seller, and retail identifier, for all options trading; individual options market maker quotations, including all upticks and downticks in the actual time sequence they occur; trade reports containing information on options, including transaction price, size, time, buyer and seller, retail identifier, and class and series information; daily options reports for members showing proprietary and customer account information on all positions of 200 contracts or more; and opening and closing interest information as provided by OCC. The NASD states that a substantial portion of the options audit trail data would be collected through the proposed automated execution (NOAES) and order confirmation (OCT) facilities described above.

      In its December submission, the NASD stated that it is developing its equity audit trail for NMS securities by combining information collected through its price reporting system and the clearing process. The NASD Board of Governors at a meeting on March 16, 1984, voted to implement an equity audit trail for all NMS securities. The NASD has not yet worked out the full details of this equity audit trail, but expects to complete an audit trail "concept document" by June 1984.14

      The NASD also describes the monitoring systems and reports it would modify or create to use the data collected in these audit trails. These systems would be comparable to those designed by the options exchanges and would be designed to detect known violations. In addition, these systems would monitor for specific possible problems raised by side-by-side trading such as stock option manipulation and fair pricing of customer orders. This section of the NASD submission is not described in detail here, but is available at the Commission or the NASD for those who are interested in reviewing it.

      C. Request for Comments

      The Commission invites comment on the specific aspects of the NASD proposal discussed below. We also encourage commentators to comment upon aspects of the NASD proposal not addressed here. Commentators are requested to be as specific as possible in recommending any changes they believe may be needed to the NASD proposal. The Commission will, of course, also consider comments previously made 15 regarding the NASD proposal. Previous commentators are encouraged to take into account any pertinent changes in the over-the-counter market and in the NASD proposal in submitting additional comments.

      One major development in the OTC market since the submission of the NASD's proposal has been the advent of last sale reporting for certain OTC securities. Under Rule HAa2-l ("Rule") under the Act, adopted by the Commission in February 1981,16 certain actively traded OTC securities were mandatorily designated as NMS securities, while certain additional OTC securities meeting less stringent standards could be designated as NMS securities at the election of the issuer. The primary effect of designation as an NMS security at the present time is to require that transactions in the security be reported on a real time basis and that quotations in the security be firm for the size publicly displayed.

      The first NMS securities were designated on April 1, 1982. Since that time, 831 securities have become designated and subject to last sale reporting in the OTC market. As the numbers of NMS securities have expanded, the NASD and the Commission have monitored the effects of the last sale reporting process 17 and have engaged in ongoing surveillance of trade reporting practices. In general, this monitoring has shown that market maker firms are meeting satisfactorily the Rule's reporting standards and that OTC last sale reporting it taking place in an accurate and reliable manner.

      Despite the high overall quality of last sale reporting for NMS securities, the Commission believes that last sale reporting during peak periods of trading activity, such as the first and last hours of trading, can be further improved. The continued reliance by many firms on reporting by traders means that as the pace of trading accelerates during high pressure periods, the quality and timeliness of trade reporting may suffer at times. If options were to trade on an NMS security, it would be particularly important that last sale reports for the underlying security accurately reflect the activity and direction of the underlying market in that security. Consequently, the Commission urges that market makers in NMS securities to take steps to reduce their reliance on trader reporting, through greater use, of existing alternative facilities or restructuring their reporting systems.18

      The NASD staff, recognizing the special importance of ensuring the timeliness and accuracy of last sale reports in the context of options trading, has concurred in a Commission staff suggestion that the NASD should ensure that conditions conducive to accurate last sale reporting pertain for firms that propose to engage in side-by-side market making. In this regard, the NASD staff has agreed to submit to the NASD Board a Commission staff suggestion that firms seeking to engage in side-by-side trading submit for NASD review a detailed description of their reporting procedures and systems in order to ensure that these procedures will sustain accurate trade reporting.

      In view of the NASD's tentative concurrence in these steps to ensure further reporting accuracy, and the generally satisfactory quality of OTC last sale reporting to date, the Commission preliminarily relieves that the information provided by NMS last sale reporting is sufficiently timely and accurate to support options trading on NMS securities. However, in addition to the comments requested below on specific aspects of the NASD's proposal, the Commission invites comment on the concept of prior review by the NASD of reporting facilities as a condition to registration as a side-by-side market maker.

      In addition, the Commission requests comment on the following issues:

      1. Side-by-Side Trading. Previous commentators have questioned the propriety of side-by-side market making in options and their underlying securities. The Amex, for instance, has stated that:
      A dual market maker would have strong economic incentives to trade options on the basis of non-public market information gained through his activity in the underlying stock (or vice versa), and to try to manipulate the price of the underlying stock in order to increase the profitability of his options positions. The dual market maker in stocks and options would also have a greater ability to act on those incentives than someone who functioned as a market maker only in one of the two types of securities. ... At the same time that dual market making would increase the opportunities to engage in questionable practices, it would diminish the feasibility of performing effective surveillance. 19
      The NASD argues that the informational and competitive advantages of side-by-side market makers are greatly reduced in the competitive, over-the-counter market maker environment 20 and that existing regulatory and surveillance activities can be adapted to the regulation of options trading in a side-by-side market maker environment. Furthermore, the NASD argues that significant efficiencies are obtainable through the integration of market making in the underlying security and the related option. Finally, the NASD notes that the firms most likely interested in committing capital to NASDAQ options market making will be those who already have developed trading expertise and retail interest through market making activities in the underlying security. Therefore, the NASD states that if side-by-side market making is not permitted, it is unlikely that the NASDAQ options program will be implemented. 21
      We invite additional comment on this issue, and encourage commentators to address the following specific questions:
      (a) Commentators are invited to address the concerns raised by Amex with regard to the informational advantages possessed by side-by-side market makers and the NASD's rejoinder that these concerns are not applicable in the context of its current proposal. Does the NASD proposal prescribe the conditions that must pertain in order for a market to be-sufficiently "competitive" to overcome any informational and competitive advantages that might be attributable to side-by-side market makers over other market participants? In this connection, commentators should discuss the minimum number of stock and options market makers in the underlying security and the options group that should be required. In addition, commentators should consider whether there are other approaches to addressing this problem that might be employed instead of or in conjunction with the minimum market maker requirements, such as standards to assure that no single market maker dominated the market for the underlying security, or to assure that there were several market makers that were in fact active in the market for the underlying stock on a regular or continuous basis. Commentators might also consider whether the rules for eligibility for underlying stocks help assure that NASDAQ options will be traded only on those stocks that are traded in a competitive environment. In particular, the Commission requests comments on the usefulness of an initial pilot NASDAQ options program limited to the top 20 NMS stocks, in terms of volume or other criteria, that were eligible for side-by-side market making.
      (b) Are the regulations the NASD proposes to impose upon side-by-side market makers adequate?22 In this connection, commentators are encouraged to discuss the adequacy of the NASD's proposed commitment rule and the related penalties. In addition, commentators might address whether additional regulatory requirements might be imposed upon side-by-side market makers, such as are imposed upon competitive market makers at the exchanges employing a competitive market maker system. 23 Market makers whos are not side-by side market makers are required to enter firm quotes, but are not otherwise bound by the commitment rules and penalties to which side-by-side market makers are subject. Among other things, this means that such market makers are not required to make markets in all options series overlying a particular stock and that, if the stock is not eligible for side-by-side market making, some options series might not have published quotes from any market maker. Commentators should discuss whether non-side-by-side market makers should be required to enter quotes in all options series, and, if not, whether some other provision can be made to assure that continuous and competitive markets are available in all options series.
      (c) Does the NASD proposal provide for the specific surveillance needs side- by-side trading would entail, both on the options and equity side?
      (d) The NASD has stated that its NASDAQ options program would not have adequate support without side-by- side market making. The Commission solicits comment regarding whether NASD members would be interested in trading NASDAQ options in the event side-by-side market making were not permitted with respect to a large number of, or any, options classes.
      2. NOAES and OCT. The proposed NOAES would be the first small order automatic execution system for options, and NASD has stated that it would provide a prime source of data for the NASD's options audit trail. Likewise, the "order confirmation transaction" feature would be a source of a substantial portion of the NASD's options audit trail.
      Comment is requested regarding NOAES and OCT as proposed, both regarding these systems' merits as execution and confirmation systems, respectively, and with a view to the contribution such systems will make to the creation of an options audit trail data base. For example, the NOAES proposal would provide for the "preferencing" of orders, in which a particular firm would be designated for execution of automated orders. A firm would not, however, be allowed to preference itself, so that it could not use NOAES to capture retail order flow it originates24 The preferencing feature then, would appear to be useful primarily to permit firms to reduce any risk that they are trading with financially unsound market makers. Commentators might discuss the desirability of this preferencing feature, and whether the lack of ability to self-preference serves as an appropriate inducement to smaller market makers to participate in NOAES or rather is unfair to market makers with retail order flow.
      Comment is also requested regarding the merits of the proposed NOAES opening procedures, under which preferenced orders not accepted by the preferenced market maker do not receive a guaranteed execution at the best NOAES opening, but instead are held in NOAES for a post-opening automated execution. In this regard, the NASD proposal would permit a market maker to adjust its exposure limits up to the time trading opens, e.g.. in response to orders above the three contract limit received prior to the opening. Commentators should address whether this could result in inferior executions for NOAES orders submitted before the opening. If so, consideration should be given to whether any alternatives are available that would not expose market makers to uncertain obligations or result in disadvantaging OCT orders submitted before the opening.
      Finally, consistent with exchange stock small order execution systems, only customer orders can be entered through the NOAES system. This limitation appears to reflect concerns regarding potential market maker exposure if other market professionals possessing substantial market information are permitted to automatically execute against his quote. Comment is requested regarding the desirability of this limitation.25
      3. Surveillance. The NASD states that it intends to establish complete options and equity audit trails and a surveillance system comparable to those of the options exchanges. Commentators might discuss the adequacy of the NASD's proposed overall surveillance system, particularly with a view to the special surveillance needs created in a side-by-side trading environment.
      4. Spreads and Oilier Multi-Part Orders. The NASD has indicated that one advantage of side-by-side trading is that it might result in more efficient executions of combination stock/options orders. It should be noted that most stock/options and option spread, straddle and combination orders are entered at net debits or credits, rather than by separately pricing each component of the order. The NASDAQ options proposal includes no provision for the entry of quotes by market markers at net prices on such combination orders. Given the frequency of such orders in the exchange options markets, commentators are urged to consider whether it is feasible for the NASDAQ options program to incorporate quotations for combination orders and, if not, to assess the impact of the absence of such quotes on the efficiency of the NASDAQ options market.
      5. Warrants Precedent. In discussing the utility and lack of manipulative concerns of side-by-side market making, the NASD relies substantially on the experience of the NASD and the exchanges in trading warrants side-by- side with the stocks to which, those warrants relate. In particular, the NASD asserts that the absence of known problems involving manipulation, frontrunning or other abuses in trading warrants in a side-by-side environment, suggests that such problems are unlikely in similar options trading. While warrants differ from standardized stock options in a number of respects, including their terms to maturity, their relatively higher prices and the smaller amount of trading activity in them, they nevertheless possess essential characteristics that are largely the same as options. Commentators are requested to assess the usefulness of the warrants trading experience as a precedent for side-by-side trading, with regard to such matters as likelihood of or incentives for manipulation, misuse of market information and the efficiencies of side- by-side trading.
      6. Indices. Previous comment has pointed out the lack of many essential ingredients in the index options portion of the NASD proposal, such as the absence of the list of component stocks in the subindices, the absence of a description of the way in which the indices will be calculated, and the absence of position and exercise limit rules.26 Before the Commission may approve the NASD proposal, the NASD will have to submit to the Commission rules in these areas for publication under Section 19(b) of the Act. Commentators are invited to comment on those aspects of the index options proposal that the NASD has submitted, as well as any other matters involving NASDAQ index options. Comment is specifically requested regarding the appropriateness of trading options on broad and narrow-based indices that are comprised of stocks that do not have last sale reports available.27 In addition, commentators might discuss the economic utility of having both NASDAQ and NMS sub-indices on identical industry sectors.

      III. The Exchange Proposals

      A. Introduction

      The CBOE, Amex PSE, Phlx and NYSE propose to list options on OTC stocks that have been designated as national market system securities pursuant to Tier I criteria under Rule HAa2-l{b)(l) under the Act ("Exchange proposals"). Under the exchange proposals, OTC securities would qualify for options trading on an exchange if they meet both the Tier I criteria under rule HAa2-l and the exchanges' existing numerical options eligibility standards.28

      The CBOE, PSE and Phlx have also requested that the Commission amend rule 12a-6 under the Act.29 Rule 12a-6 effectively prohibits the exchange trading of options on securities not listed and registered under section 12(a) of the Act and thus effectively bars an exchange from trading options on OTC securities.30

      In 1976 and 1977, the CBOE, Amex, PSE and Midwest Stock Exchange ("MSE") also proposed to list standardized options on underlying securities traded exclusively in the OTC market.31 These proposals, however, were voluntarily withdrawn pursuant to an agreement between the Commission and the self-regulatory organizations that were participating in a moratorium on the introduction of new options products.32

      At the time the original proposals to trade options on OTC stocks were submitted, there was no real-time transaction reporting for OTC stocks. As indicated in the section relating to the NASD proposal, real-time last sale reporting is now required for transactions in NMS securities and the exchanges propose to trade options on NMS securities only. Although the changes in the OTC market brought about by the development of the national market system may alleviate some of the initial concerns the Commission had over exchange trading of options on OTC securities, the current proposals by the exchanges to list and trade options on NASDAQ/NMS Tier I securities presents a number of significant issues upon which the Commission is inviting public comment.

      B. Request for Comments

      The Commission invites comments on the specific questions presented below. Commentators are requested to be as specific as possible in recommending any changes they believe may be needed to the Exchange proposals. We also encourage commentators to discuss aspects of the exchange proposals not specifically addressed here.

      1. Allocation of Options,
      (a) Introduction. The trading of standardized options with the same underlying security on more than one marketplace, with reliance on the market to allocate trading interest in those options to the various marketplaces, is referred to as "multiple trading". Beginning in February 1976, the Commission permitted limited experimentation in multiple trading. In aggregate, 22 options on individual listed stocks in the past have been multiple-traded and currently 12 stock options are multiply traded. Expansion of multiple trading of options on individual listed stocks has been prohibited since the commencement of the options moratorium in July 1977.
      Neither the exchanges nor the NASD seek permission explicitly to trade options on 3tocks on which options are traded in another marketplace. Nonetheless, the Commission feels that these proposals raise a number of questions with respect to the manner in and extent to which options on over-the-counter securities should be allocated among markets.
      First, in the even that the Commission concluded that it was appropriate for options on NMS securities to be traded both by the NASD and the exchanges, this would raise questions as to whether and under what circumstances both the NASD and an exchange should be permitted to trade options on the same underlying NMS stock. Second, apart from that question, consideration must be given to whether, among the exchanges, the Commission should extend the ban on expanding, multiple trading of options on listed stocks to also cover options on NMS stocks.
      (b) Previous Commission Statements Regarding the Allocation of Options on Individual Securities. In its 1980 release announcing the termination of the options moratorium, the Commission identified certain potential benefits that could result from relying on the market, rather that the Commission or the exchanges, to allocate options trading activity among the exchanges:
      [A]n expansion of multiple trading in options may be beneficial to public investors and market professionals. In addition to the direct effects of intermarket competition in terms of increased depth and liquidity, multiple markets provide brokers and dealers with alternative markets in which to execute orders for a particular options class, thereby assuring that securities market participants are given an effective means of influencing market centers to provide more efficient pricing, execution and clearing services. Moreover, without the discipline provided through competition among market makers and among market centers resulting from multiple trading, the Commission would have to assume an undesirable oversight role in the allocation of securities to particular markets.33
      The Commission also noted certain concerns that historically have been associated with multiple trading of equity options. For example, the Commission noted that, to the extent multiple trading results in a significant dispersion of order flow among markets, it could raise concerns regarding market fragmentation, resulting in potential price disparities (particularly at the opening) and difficulties by brokers in obtaining best execution of their customer's orders. Moreover, the Commission stated that, because of the "primary market" phenomenon,34 any meaningful order-by-order price competition resulting from multiple trading likely would be transitory at best.35 The Commission also was concerned that expansion of multiple trading of equity options in the then current market environment might adversely affect to a material degree the financial condition of the Phlx and the PSF.,36 thereby jeopardizing the ability of these regional exchanges to participate as meaningful competitors in the continuing development of a national market system for stocks.37
      The Commission concluded that, under appropriate circumstances, the benefits of multiple trading of equity options appeared to outweigh the potential adverse consequences. Nevertheless, the Commission expressed the view that the near term development of market integration facilities might create a fairer, more efficient market structure within which multiple trading could occur and deferred further action on multiple trading to afford the self-regulatory organizations ("SRO") an opportunity to examine whether and to what extent the development of such facilities would alleviate market fragmentation concerns and maximize competitive opportunities.38 On September 2, 1981, a joint SRO task force formed to address the feasibility of such market integration facilities submitted its final report to the Commission, which, in general, concluded that market integration facilities for equity options are not feasible.39 The Commission has not revisited its deferral decision since the receipt of the final report.
      On December 2, 1981, the Commission issued a release in which it determined to permit the market, rather than the Commission or the exchanges, to allocate non-equity options.40 In deciding to rely on the market to allocate options on non-equity securities, the Commission addressed industry concerns over market fragmentation and unfair competition. It concluded that the benefits of multiple trading of non-equity options outweighed the possible negative effects. First, the Commission stated that allowing multiple trading of non-equity options is the approach most likely to promote competition and result in the development of options contracts best suited to the economic needs of market participants. Second, the Commission stated that multiple trading should enhance price competition among the exchange markets, at least until a primary market in a particular option emerged. Third, the Commission concluded that multiple trading of nonequity options could increase inter-market competition with respect to the quality of markets and the quality of execution and back office services. Fourth, since no potential market was substantially reliant on revenue flow from the trading of non-equity options, in the Commission's view the existing market structure would not be disrupted, and a marketplace's financial stability or ability to participate in other areas of the securities markets would not be jeopardized by the multiple listing of non-equity options. Fifth, the Commission found that Fragmentation concerns associated with order-by-order price competition among competing markets would only be a short-term effect, because it was likely that a predominant market would emerge for each non-equity option.
      The Commission, in its orders approving exchange proposals to trade options on stock-indices, noted that the issues involved with respect to multiple trading of stock indices are substantially similar to those involved in the allocation of the previously considered non-equity options. Accordingly, the Commission stated that it was inclined to extend its market allocation policy regarding non-equity options to stock index options.41
      Because options on individual NMS stocks are not currently traded, the multiple trading of options on such securities would not in the Commission's view radically disrupt the existing market structure. For the same reasons, no marketplace's financial ability to participate in other areas of securities markets would be jeopardized by the multiple trading of options on NMS securities. On the other hand, the NASD's entry into the listed options market is effectively barred by the existing ban on the multiple trading of listed options; the allocation of options on NMS securities might, therefore, impose insurmountable competitive burdens on the NASD's participation in the standardized individual stock options market.
      Given the advantages the Commission has identified are obtained from multiple trading and the limited risk of significant long-term market fragmentation or radical effect on existing markets, the Commission preliminarily believes that its present position on the multiple trading of new options products should be extended to options on NMS securities.
      The Commission is nevertheless requesting comment on this question.
      (c) Solicitation of Comments. As noted above, two different types of market allocation issues arise in connection with the exchange and NASD proposals: trading both over-the-counter and on an exchange of an option on the same underlying NMS stock and trading on more than one exchange of options on the same underlying NMS stock. The Commission is soliciting comment on the issues raised by both of these types of multiple trading.42 In responding to the questions below, commentators are asked to specify how if at all their responses differ in regard to each of these two circumstances or a combination of them.
      (1) In the absence of market integration facilities, what are the potential market fragmentation effects of the multiple trading of the options being proposed? What is the likely duration of any such effects? To what extent, if any, is the primary market phenomenon likely to occur if multiple trading of these options is allowed in the absence of market linkage facilities?
      (2) Unlike the exchange options markets, the NASD proposal would require quotations in NASDAQ options to be firm for at least one contract. The Commission requests comment regarding whether the availability of firm quotations in at least one market enhances the feasibility of a market linkage system for OTG options.
      (3) The NASD proposal contains elements of a market linkage system, such as electronic inter-dealer and dealer-broker communication linkages and a firm quotation policy, that would appear to have possible application between OTC and exchange markets. Please discuss the feasibility of extending the NASD's system and rules for competing market makers, as proposed or as they might be modified, between competing marketplaces.
      (4) The multiple trading of options on NMS securities, if permitted, would result for the first time in direct competition in standardized options among exchange and OTC market makers. Comment is requested regarding the competitive and regulatory implications resulting from OTC market makers (including integrated retail firms) making markets in competition with exchange market makers.
      (5) As with non-equity and stock index options, it would appear that no market has made substantial investments in a market for options on NMS stocks in reliance on an exclusive franchise for any such options, or that any existing market structure would be disrupted if the market were relied on to allocate such options. The Commission would appreciate any information that would support or dispute this conclusion. If the primary market phenomenon does occur, what financial effect would this have on the different exchanges and the NASD? Please quantify to the extent possible.
      (6) NASD entry into the market for options on listed stocks is currently barred because of the existing system for the allocation of those options among exchanges. In light of this, what effect, if any, would the allocation of options on NMS securities have on the ability of the OTC market to be a competitive force in the market for individual stock options? Is the NASD placed at unfair competitive advantage if exchanges are permitted to trade options on OTC stocks while the continued deferral of multiple trading effectively bars the NASD from trading options on listed securities traded on options exchanges.
      2. Surveillance. The New York Stock Exchange, Inc., which is the primary market for the vast majority of the stocks underlying individual listed stock options trading, is currently developing a complete audit trail for those underlying stocks. The Commission has indicated its belief that the availability of underlying stock audit trail information will greatly enhance the options exchanges' ability to detect intermarket manipulations. In light of the NASD's commitment to build an audit trail for NMS stocks, commentators are requested to discuss whether implementation of an adequate equity audit trail and equity surveillance system should be a precondition to any trading of standardized options on NMS securities.43 Commentators should address any special surveillance problems which may arise if options on NMS stocks are multiply traded either on the OTC market and exchanges, or on several exchanges.
      3. Unlisted Trading Privileges. Subject to a limited exception,44 the Commission has not granted exchange applications for unlisted trading privileges on stocks traded exclusively over-the-counter. The Commission has indicated that this policy is to remain in effect pending resolution of the market structure issues raised by such trading.45
      In another context, the Commission has observed that the trading of derivatives of securities can serve as a surrogate or alternative to investment in the security itself.46 This would appear particularly to be the case where an option is deep-in-the-money. On the other hand, given the relative infrequency with which exchange-traded options are exercised, it would appear that investors generally are not now using stock options as a vehicle for actually acquiring or disposing of the underlying security.
      Commentators are requested to address the relationship, if any, of the Commission's policy on exchange unlisted trading privileges of OTC stocks to the exchange proposals to trade options on NMS stocks.
      All interested persons are invited to submit in writing no later than June 15, 1984,15 copies of their views concerning the proposed rule change to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. All communications should refer to File No. SR-NASD-80-10 or Amex-83-33, CBOE-83-53, NYSE-64-4, PSE-64-2 or Phlx-83-27, as appropriate.

      All communications will be available for public inspection at the Commission's Public Reference Room. 450 Fifth Street, NW., Washington, DC 20549.

      Dated: April 12, 1984.

      By the Commission.
      George A. Fitzsimmons,
      Secretary


      1/ Letter to Gordon S. Macklin from Roderick M. Hills, dated September 24, 1976.

      2/ Id.

      1 Notice of the proposed rule change was given in Securities Exchange Act Release No. 16979. July 15, 1980; 435 FR 53295. August 11, 1980.

      2 Notice of Amendment No. 1 was given in Securities Exchange Act Release No. 18017. July 28, 1982, 47 FR 33575. August 3, 1982.

      3 Notice of Amendment No. 2 was given in Securities Exchange Act Release No. 19330. December 13, 1962. 47 FR 57812, December 28, 1982.

      4 Submission of December 22, 1983. accompanied by letter dated December 22, 1983 from Gordon Macklin. President. NASD, to Douglas Scarff. Director. Division of Market Regulation, SEC (the "December submission"). The December submission was not made pursuant to Section 19(b)(l) of the Act and Rule 19b-4 thereunder: while the changes it proposes to the proposed rule change will eventually have to be filed as amendment to the proposed rule change pursuant to Rule 19b-4. the contents of this submission are included in the description and discussion of the NASD proposal set forth below.

      5 Notice of CBOE's proposal was given in Securities Exchange Act Release No. 20471, December 9, 1983, 48 FR 55939, December 16, 1983; notice of Amex's proposal was given in Securities Exchange Act Release No. 20498. December 16, 1983; FR 56875, December 23, 1983; notice of PSE's proposal was given in Securities Exchange Act Release No. 20538, January 6, 1984, 49 FR 1808, January 13, 1984; notice of Phix's proposal was given in Securities Exchange Act Release No. 20690, February 23, 1984, 49 FR 4684. March 1, 1984; and notice of NYSE's proposal was given in Securities Exchange Act Release No. 20691, February 23, 1984, 40 FR 7082, March 1,1G84.

      6 Rule 12a-6 essentially allows an exchange to trade an option on a security without registering that security under Section 12(a) of the Act only if, among other things, the security is registered under Section 12(a) on some other national securities exchange. Amex and the NYSE also understand that an amendment to Rule 12a-6 is a necessary precondition to approval of their proposals.

      7 See Securities Exchange Act Release No. 20854 (April 12, 1984).

      8 The NASD also proposes to allow a security registered on a national securities exchange to underlie a NASDAQ option if that security is not a "covered security" under Rule 19c-3 under the Act and if the security does not at the time of qualification for NASDAQ options trading underlie an exchange traded option issued by the OCC. The NASD has agreed to a deferral of Commission consideration of this portion of its proposal. For this reason, the Commission in not at this time soliciting comment on this aspect of the NASD's proposal.

      9 These eligibility criteria require in general: (1) A minimum public float of 7 million shares: (2) at least 6,000 beneficial owners of the security; (3) aggregate trading volume of at least 2.4 million shares during the 12 months preceding authorization of the option; and 14) a closing price of $10.00 per share on each business day for the 3 months preceding authorization of the option.
      The NASD also proposes "maintenance criteria" for stocks underlying NASDAQ options that are identical to those used by the options exchanges. These criteria require that no new series be introduced in an option if, among other things, the , underlying stock falls below certain volume, float and price levels.

      10 In addition to commenting on the specific issues discussed below, commentators might discuss the competitive implications of this proposed provision that the issuer's consent be required before NASDAQ options are traded on an otherwise eligible security.

      11 Under the NASD proposal, an option "group" defined as all options contracts of the same class of options having the same exercise price and unit of trading but separate expiration dates.

      12 The NASD also states that any side-by-side market maker who fails to abide by these commitment rules could have its market maker registration in the underlying security revoked for a period of time through the NASD's disciplinary procedures. The NASD also states that any side-by-side market maker whose options quotations in a side-by-side class were withdrawn during the fifteen days preceding expiration of an options series may be found in violation of Article III, Section I of the NASD's Rules of Fair Practice, which obligates members to act in accordance with high standards of commercial honor and just and equitable principles of trade.
      Members who elect not become side-by-side market makers would not be bound by the commitment rule, and, while obligated to render firm quotations, would not be required to quote all open options series in options classes in which they were registered. for specific possible

      13 See File No. SR-NASD-84-4, Securities Exchange Act Release No. 20719, March 6, 1984.49 FR 9523, March 13, 1984. Under this proposal, margin for market or "broad-based" index options would be set at premium plus 10 percent of contract value minus out-of-the-money amounts, with a minimum required deposit of 2 percent of the contract value. Margin for industry or "narrow-based" index options would be 30 percent of contract value plus or minus in- or out-of-the-money amounts, with a minimum required deposit of $250.00.

      14 See letter dated March 22, 1984, from Frank J. Wilson. Executive Vice President, Legal and Compliance, NASD to Douglas Scarff, Director. Division of Market Regulation, SEC

      15 See File No. SR-NASD-80-10.

      16 See Securities Exchange Act Release No. 17549 (February 17, 1981), 48 FR 13992.

      17 The NASD engaged In an extensive study of the results of last sale reporting during February through April 1983. See Securities Exchange Act Release No. 19797 (May 20, 1983 1. 48 FR 24823.

      18 The Commission notes that the NASD currently offers a computer-to-computer interface that allows trade reports to be simultaneously entered into a firm's in-house order handling system and submitted to the NASD for trade reporting purposes. The NASD has informed the Commission that several major firms use this interface now, and a number of others have recently expressed interest in using the interface. Firms using this interface thus are able to use their clerks for both the necessary input into their own systems, and for trade reporting. Alternatively, firms could employ additional clerks to relieve traders of the task of reporting trades through their existing NASDAQ terminals. Separately, the NASD is developing a Small Order Execution System that will automatically execute and report orders of 300 shares or less entered into the system. This system should significantly reduce the number of individual trades handled by traders, while improving the reliability of their reports.

      19 Letter dated November 29, 1980, from Richard O. Scribner, Executive Vice President, Amex, to George A. Fitzsimmons. Secretary, SEC.

      20 As the NASD points out, the 1978 Special Study of the Options Market (the "Options Study"), recognizing the competitive market making system used in the over-the-counter market maker is likely to have the market information and competitive advantages or opportunities to engage in manipulative or other improper practices of the nature and dimension of these that integration would create for a unitary stock specialist on a primary stock exchange with a centralized stock limit order book to which he has access." At the same time, the Options Study observed that "* * * the opportunity to trade against the orders of retail customers in an OTC market may present market information and competitive advantages end regulatory concerns that do not have counterparts in exchange markets." Report of the Special Study of the Options Market to the Securities and Exchange Commission, H. Rep. No. IFC-3, 96th Cong., 1st Sees. (Comm. Print 1978) at pp. 955-958.

      21 The complete NASD arguments on this issue are contained in the December submission which is available at the Commission for public inspection.

      22 In addition, commentators are requested to consider whether any of the conditions proposed by the NASD are excessive to control the informational and other concerns raised by side-by-side trading.

      23 CBOE and the PSE. which employ a competitive market maker system, as well as the options exchanges employing a specialist system, impose certain maximum spread and price continuity limitations upon their market makers See. e.g., CBOE Rule 8.7(b)(i) and (u).

      24 "Self-preferencing" is also prohibited in SOES, NASD's automated small order stock execution system.

      25 A unique feature of the NASD proposal would be the use, for the first time in U.S. markets, of firm quotations for options. Quotations would be firm both with respect to orders entered through NOAES system and outside of NOAES in the past, the options exchanges have expressed the view that firm quotations are not feasible for options trading. See. e.g., letter dated September 22, 1980. from Walter E. Auch. Chairman and Chief Executive Officer. CBOE. to George A. Fitzsimmons. Secretary. SEC (File No. S7-772). Commentators are requested to evaluate this position in light of the NASD proposal.
      The NASD relies on firm quotations to impose price discipline on market participants and as a check against manipulation. Outside of NOAES, however, there appears to be no obligation for quotes to be firm for more than a single contract. Commentators are urged to consider whether firm quotations under these circumstances will accomplish the objectives intended by the NASD. It should be noted that, although quotations in size can now be entered in the NASDAQ system for stocks, virtually no market makers have taken advantage of this feature.

      26 See e.g.. letter dated August 24, 1982, from Richard O. Scribner. Executive Vice President. Amex, to George A. Fitzsimmons, Secretary, SEC.

      27 The NASDAQ Composite Index and the sub-indices of the composite index presumably would be comprised of a large number stocks as to which there are no last sale reports.

      28 The exchanges' eligibility standards are described at n. 9 above.

      29 "The NYSE and Amex understand that an amendment to rule 12a-6 is a necessary precondition to approval of their proposals as well as the proposals of the other exchanges.

      30 The Commission has published today a companion release seeking comments on proposed amendments to Rule 12a-6. See Securities Exchange Au release No. 20854. These amendments, if approved, would remove the current statutory ban on exchange trading of options on OTC stocks.

      31 Notice of CBOE's proposal was given in Securities Exchange Act Release No. 12703, August 12, 1976, 41 FR 358B4. August 23, 1976; notice of Amex'8 proposal was given in Securities Exchange Act Release No. 13095, December 22, 1976, 42 FR 2145. January 10, 1977; notice of PSE's proposal was given in Securities Exchange Act Release No. 12539, June 11, 1976, 41 FR 24787, June 18, W76; notice of MSE's proposal was given in Securities Exchange Act Release No. 130406. March 25, 1977, 42 FR 19200, April 12, 1977.

      32 See Securities Exchange act Release No. 1S026 (August 3, 1978) and Securities Exchange Act Release No. 14878 (June 22, 1978).

      33 Securities Exchange Act Release No. 16701 at pages 26-27, March 26,19P0 ("Moratorium Termination Release") [45 FR 21426. April 1, 1980].

      34 The primary market phenomenon! refer* to the tendency of one exchange ultimately to receive the preponderance of trading volume in a particular option. Since most large retail firms generally designate one market to which they automatically route virtually all of their retail order flow in a particular options class, largely on the basis of the relative trading volume attracted by each exchange, primary market designation in effect becomes a "self fulfilling prophecy." and accordingly, any real intermarket competition for public order flow occurs for the short term only. See Options Study, at 853.

      35 Moratorium Termination Release at 27-31.

      36 Id. at n. 47. At the same time, the Commission made it clear that it did no regard the perpetuation of any particular exchange or exchanges to ha a legitimate objective of any options allocation policy This view is supported by the Commission's mandate under the Act. Although the Act requires the Commission to balance the perceived anticompetitive effects of a regulatory policy or decision against the purposes of the Exchange Act that would be achieved thereby and the costs of doing so. it docs not impose an obligation on the Commission to justify its actions as the anticompetitive approach to achieving its objectives. See Options Study at 870.

      37 These possible effects of multiple trading were also analyzed in detail in the Options Study. Options Study, at 800-643. The Options Study, however, declined to formulate any specific recommendations on the multiple trading issue

      38 To assist the SROs and expedite their deliberations, the moratorium termination release contained a discussion of several possible options market integration facilities, including a system similar to the Intermarket Trading System ("ITS") and the individualized routing of retail orders, as well as possible implementation of an order exposure system for public options orders.

      39 See letter from Nicholas A. Giordano, President. Phlx, to George Simon, Associate Director. Division of Market Regulation (September 2, 1981).

      40 Securities Exchange Act Release No. 18297 (December 2, 1981); 46 FR 60376 (December 9, 1981)

      41 Securities Exchange Ac! Release Nos. 19264 and ZUO75. November 22, 1982 and August 12, 1983; 47 FR 53981 and 48 FR 37556. November 29, 1982 and August 18, 1983.

      42 The possible multiple trading of options on NMS stocks raises at least one question in addition to those listed in the text above: viz. whether or not exchange off-board trading restrictions should continue to apply if multiple trading between the exchanger, and the NASD is permitted. Some of the exchange?, have rules that forbid the trading off the exchange of options on stocks on which the exchange offers options. See, e.g., CBOE Rule 8.49. These off-board trading restrictions were initially adopted to assure that all transactions in standardized options (except accommodation liquidations) occurred on an exchange floor. By their terms, however, these rules could also be applied to prevent exchange members from trading multiple traded standardized options on the NASDAQ system. The Commission preliminarily believes that as a precondition to Commission approval of any exchange proposal to trade options on NMS stocks an exchange would have to amend any off-board trading restriction it may have to allow its members to trade standardized options over-the-counter. The Commission welcomes, however, any comments on this preliminary position.

      43 Aside from audit trail and surveillance considerations, it would appear that there are few if any obstacles to prompt implementation of the exchange OTC options proposals. Implementation of the NASD proposal, however, would appear to be several months away et the earliest. Commentators are urged to address the competitive implications of asynchronous Commission consideration of the exchange and NASD proposals, particularly in light of the "primary market phenomenon."

      44 See, e.g.. In the Matter of Pacific Resources. Inc., Securities Exchange Act Release No. 175B4,


    • 84-26 Request for Comment on Proposed Criteria for NASDAQ NMS Designation

      TO: All NASD Members and Other Interested Persons

      On April 30, 1984, the Securities and Exchange Commission ("SEC" or "Commission") published for comment changes to the National Market System (NMS) designation criteria which by the National Association of Securities Dealers, Inc. ("Association" or "NASD") has proposed. If adopted, the effect of the changes would be to expand significantly the number of companies eligible for inclusion in NMS. Comments on this proposal should be submitted to the SEC no later than June 15, 1984. The Commission's release as published in the May 7th edition of the Federal Register is attached for your reference. To assist you in your review of this material, the background and summary of the NASD's proposal are discussed below.

      BACKGROUND

      The NASDAQ National Market System commenced operation on April 1, 1982, with the initial designation of 40 securities into NMS. Transactions in securities which are traded in this new environment are subject to last-sale trade reporting by market makers within 90 seconds of execution. Since the start-up of NMS, additional securities have been added according to a timetable specified in the NASD's National Market System Designation Plan. To date, 880 securities have been added to NMS and an additional 100 securities are scheduled for addition during the next few months. By the end of June, approximately 82% of the securities qualified for NMS will have been added to the system.

      When the SEC adopted the NMS designation criteria, it established a two-tiered system of requirements wherein certain very actively traded securities would be mandatorily added to NMS (Tier 1 securities) and lesser active securities would be added voluntarily (Tier 2 securities). In addition to basic financial tests, the Tier 1 criteria include a four market maker test, a $10 price test, and a volume test of 600,000 shares a month for a six-month period. Since Tier 1 securities are mandatorily added to NMS, any NASDAQ company which meets these tests is automatically designated for inclusion in the National Market System. While the Tier 2 criteria includes the same basic financial and market maker tests as Tier 1, the price test is $5 and the volume requirement is significantly less at 100,000 shares a month for a six-month period. Since Tier 2 additions are voluntary — companies meeting the criteria must submit an application for designation prior to their addition to NMS.

      The NASD's proposal would amend the voluntary criteria to permit the continued expansion of NMS through the addition of qualified companies from the NASDAQ National Newspaper List. On February 10, 1984, the NASD petitioned the SEC to amend the NMS designation criteria by replacing certain market activity tests with financial criteria. The result of the change would be an expansion from approximately 1,200 to 2,500 in the number of securities eligible for trading in the NMS.

      During the two years of operation of the National Market System, the SEC and the NASD have continuously monitored the trading activity in NMS securities and both have found that last-sale reporting has benefited the markets in these securities. Also, prior to the full-scale expansion of NMS through the addition of Tier 2 securities, a major study was conducted during February, March and April of 1983, of a limited pilot program. The purpose of this study was to determine whether NMS designation had adverse effects on the markets for Tier 2 NMS securities. The findings of the study were analyzed by the NASD's Board of Governors, its various standing committees, and various securities industry representatives and organizations, and the staff of the SEC. The study determined that NMS designation had no noticeable effect on the price performance or the volatility of prices for securities added to the National Market System.

      In addition to the special study, during the last two years the NASD Board and three standing committees (the Trading Committee, the NMS Securities Qualifications Committee and the Corporate Advisory Board) have met frequently to review activity in the National Market System and develop enhancements to facilitate trade reporting. A few observations of note are that last-sale reporting has been beneficial to the issuers of NMS designated securities, their shareholders, and members of the investment community. We have also observed that last-sale information has also provided both increased information upon which to make investment decisions as well as increased exposure to designated securities.

      Based on the favorable findings with respect to NMS designation, the NASD's Board of Governors, at the recommendations of the Trading Committee, the NMS Securities Qualifications Committee, and the Corporate Advisory Board, filed the recently proposed criteria for NMS designation with the SEC. The new criteria would extend the benefit of last-sale reporting to all Section 12(g) registered companies qualified for the NASD's National Newspaper List.

      DISCUSSION OF THE NASD'S PROPOSAL

      Today there are nearly 1,800 securities in the National Newspaper List which is published daily in over 100 newspapers throughout the world. In addition, the NASDAQ National Market System List is published in even more newspapers so that over 2,700 NASDAQ securities are now receiving publication of market activity information.

      The criteria that are proposed by the NASD would permit companies to qualify for NMS if they meet the National Newspaper List criteria which include two alternative sets of requirements. Both proposed alternatives for NMS would require that a company be registered pursuant to Section 12(g), have at least $2 million in total assets, 300 shareholders, and two market makers. In addition, the first alternative requires that the issue have a $3 price and a public float of 350,000 shares valued at $2 million, while the company must have $1 million in capital and surplus and $300,000 net income in the latest year or in two of the three last fiscal years. The second alternative proposed for NMS inclusion is for companies operating without a net income. The second alternative requires that the issue have a public float of 800,000 shares valued at $8 million and the company has a capital and surplus of $8 million with an operating history of four years.

      With respect to transaction reporting obligations associated with trading NMS securities, the NASD has enhanced the NASDAQ System to ease the burden on broker-dealers. Specifically, the NASD developed a computer-to-computer interface (CTCI) which permits firms to meet NMS trade reporting obligations by entering trade details through their in-house computer system which is, in turn, transmitted by computer to the NASDAQ System. In December of this year, the NASD's Small Order Execution System (SOES) will be operational. This system will permit firms to execute trades in NMS securities up to 300 shares directly through their NASDAQ terminals. Since trades will be executed directly through the NASDAQ System, there is no need to report the details of the transactions through the terminal. It is estimated that up to one-half of all NMS trades could be executed through SOES which would significantly reduce a firm's burden resulting from trade reporting. Finally, the NASD has been working with the National Security Traders Association (NSTA) on a proposal which would permit bunching of trade reports under certain circumstances. The bunching of trade reports reduces the total number of required trade reports without losing the necessary pricing volume information.

      Based on the system enhancements and the revision to the mechanics of trade-reporting, the Board does not feel that an expansion of the number of NMS eligible securities will significantly increase the burden of trade reporting.

      REQUEST FOR COMMENT

      In the Commission's release, the SEC accurately states that the NASD has proposed eligibility criteria for the NASDAQ National Market System identical to those of the National Newspaper List. However, the Commission staff has raised three questions for consideration regarding this proposal which the NASD finds troublesome and upon which it urges you to address your comments. Their questions and the Association's views are as follows:

      Minimum Bid Price

      • Should a minimum price standard, such as the present $5 minimum bid price, continue to be a part of NMS criteria? According to the SEC, the issues here are whether NMS designation may be used by issuers of low priced "hot issue" stocks to achieve extra prominence, and whether low priced speculative stocks are suitable for NMS designation.

      Comments — In point of fact, Alternative #1 under the NASD's proposal prescribes a minimum bid price of $3 per share and that requirement is coupled with other criteria including a net income test of $300,000 and a market value requirement of $2,000,000. It is only as to Alternative #2 under the NASD's proposal that a minimum bid price is not prescribed. However, to qualify under this alternative, a company would have to have, among other things, a capital and surplus of $8,000,000, a public float of 800,000 and an operating history of at least 4 years. Designed mainly for developing companies of substance, this alternative is based primarily on issuer characteristics and not trading markets, a practice long observed by the stock exchanges in setting their listing standards. In fact, several of the regional exchanges do not have a minimum price test as a qualification for exchange listing. In addition, the financial criteria of the National Newspaper List and the proposed National Market System are significantly higher than those prescribed in the listing standards of the various regional exchanges. Also, the second of the two alternative listing tests of the American Stock Exchange, for reasons paralleling those of the NASD, similarly prescribes no minimum price requirement. Related to this point is the fact that all of the exchanges currently have numerous securities that trade at prices below $5 per share.

      It is the Association's opinion that the principal benefit of national market system designation — namely, last-sale reporting and thus investor access to basic price information — should be equally available to both exchange-traded securities and competitive dealer-traded NASDAQ securities. The Board therefore believes that no NASDAQ security, otherwise qualified, should be prohibited from entry into NMS due to a failure to exceed some arbitrary price standard. A capital and surplus test of $8,000,000 coupled with the other prescribed criteria will insure that only the shares of companies of high quality will be admitted to trading in NMS.

      Minimum Trading Volume

      • Should the minimum volume standard be eliminated, as proposed by the NASD, or should a lower volume standard, such as 50,000 a month for six months, be adopted, to insure that all NMS stocks are actively traded?

      Comments — As noted above, the NASD once used volume based criteria as the principal criterion for qualifying stocks for its National Newspaper List. Experience proved this criterion to be unsatisfactory because it ignored the more important underlying characteristics of the issuer company. It also left the composition of such list to the changing whims of investors and the impact of current investment fads and fashions. As a consequence, the list was very unstable. Investors became puzzled by the fact that the periodic revisions to the list resulted in massive additions and deletions. It was very difficult for even the most knowledgeable of investors to keep track of what companies were in and which companies were out of the list. Many companies of substance, including many large banks, insurance companies and major financial institutions were excluded from the list and investor information about his securities holdings in these companies was simply unavailable. This all changed when the NASD replaced its National Newspaper List volume-based criteria with basic financial criteria. The list quickly stabilized. Companies of substance and quality, though possibly less actively traded, were once again included in the list and investor response was very positive. This experience, coupled with the fact that no other market center prescribes a minimum volume test of any kind as a condition to listing, strongly suggests to the Association that a volume standard is an inappropriate criterion for entry into the National Market System.

      Number of Market Makers

      • Would a reduction of the required number of competing market makers from 4 to 2, as proposed by the NASD, result in securities included in NMS which do not have sufficient nationwide investor interest and trading activity?

      Comments — The fact that a company has fewer than four market makers does not necessarily mean that the company is not a nationally recognized name, does not have a nationwide investor following or, is inactively traded. There are a significant number of National Newspaper List companies that have less than four (but at least two) market makers whose volume exceeds 50,000 shares per month. In many of these cases, it is the industry or the underlying characteristics of the issuer that cause the economic optimum in terms of the number of market makers to be either 2 or 3. This does not mean that these markets are any less liquid or lacking in depth. Competition between dealers, firm quotes and NASD market surveillance work together to insure the existence of quality markets. Indeed, many of the companies which have 2 or 3 market makers are sizable companies with strong investor followings. Furthermore, although small in number, the broker-dealers which typically make these markets are broker-dealers having considerable size, good business repute and significant financial strength. If anything, the quality of the markets made rather than the number of markets made is the more important factor. Since the quality of the market is more a function of market maker qualifications and surveillance, it is the NASD's view that any requirement beyond a two market maker test is unnecessary and perhaps inconsistent with a scheme of regulation that should be designed to let market forces determine the proper equilibrium for-market maker participation.

      * * *

      Power to finalize the NASDAQ National Market System criteria proposed by the NASD rests with the Securities and Exchange Commission and, as part of their decision-making process, the SEC has requested your comments. The NASD's Board of Governors strongly urges you to make your comments on this subject known to the SEC. Your ideas and opinions are extremely important and the nature of your comments will substantially affect the final SEC decision in this matter.

      Your comments to the SEC should reference File No. S7-787 and be directed to:

      George A. Fitzsimmons, Secretary
      Securities and Exchange Commission
      450 Fifth Street, N. W.
      Washington, D. C. 20549

      If you have questions concerning the proposal that you would like answered before writing the SEC, please feel free to call Glenn C. Faulkner, Assistant Director, NASDAQ Company Services, at (202) 728-8275.

      Finally, it would be very helpful to the Board if you would provide us with a copy of your comment letter to the SEC. It may be sent to:

      Glenn C. Faulkner, Assistant Director
      National Association of Securities Dealers, Inc.
      1735 K Street, N. W.
      Washington, D. C. 20006

      Once again, your participation in this rulemaking process is extremely important. Whether you agree or disagree with the NASD's views on this proposal, it is vital that you communicate your thinking to the SEC. Only by so doing can you be assured that your voice will be heard.

      Thank you.

      Sincerely,

      Gordon S. Macklin
      President

      Enclosure

      Federal register

      Monday
      May 7, 1984

      SECURITIES AND EXCHANGE COMMISSION

      17 CFR Part 240

      [Release No. 34-20902; File No. S7-787]

      Designation on National Market System Securities

      AGENCY: Securities and Exchange Commission.

      ACTION: Proposed rule amendments and solicitation of public comments.

      SUMMARY: In response to a petition submitted by the National Association of Securities Dealers, Inc., the Commission is proposing amendments to its rule governing the designation of securities qualified for trading in a national market system. The primary effect of these amendments would be to increase substantially the number of securities that would be eligible for designation as national market system securities.

      DATE: Comments to be received by June 15, 1984.

      ADDRESSES: All comments should be submitted in triplicate and addressed to George A. Fitzsimmons, Secretary, Securities and Exchange Commission, 450 Fifth Street NW.. Washington, D.C. 20549. All comments should be refer to File No. S7-787, and will be available for public inspection at the Commission's Public Reference Room, 450 Fifth Street, NW., Washington, D.C.

      FOR FURTHER INFORMATION CONTACT: Andrew E. Feldman, (202) 272-2388, Room 5190, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, D.C. 20549.

      SUPPLEMENTARY INFORMATION:

      Summary

      The Securities and Exchange Commission ("Commission") today proposed amendments to Rule HAa2-l ("Rule") l under the Securities Exchange Act of 1934 ("Act"), 2 which establishes procedures by which certain securities are designated as qualified for trading in a national market system ("NMS Securities"). This action is in response to a recent petition by the National Association of Securities Dealers, Inc. ("NASD") requesting that the Commission expand the Rule's qualification standards to the level of its National List standards, thus making a total of approximately 2500 securities eligible for NMS designation. The principal effects of NMS designation are that designated securities are subject to last-sale reporting and firm quote requirements. The Commission has monitored trading in NMS Securities carefully and believes that last sale reporting has benefited the over-the-counter ("OTC") markets for those securities; the Commission also preliminarily believes that a substantial expansion of the NMS criteria may be appropriate. The standards proposed by the NASD are discussed in detail below and summarized in a chart included as Exhibit A. In addition to the broad issue of the expansion of the number of securities eligible for NMS designation, the Commission requests comment, as discussed more fully below, regarding the importance of the Rule's current minimum net price, market maker, and trading volume requirements.

      I. Background

      Section 11A(a)(2) of the Act directs the Commission "to facilitate the establishment of a national market system," and empowers the Commission to designate by rule "the securities or classes of securities qualified for trading in the national market system." Although the Act does not specify which securities should be included in a national market system, the legislative history indicates that the Commission should evaluate characteristics of a security such as "trading volume, price, and number of stockholders" in determining whether a security should be designated as an NMS Security. 3

      On February 17, 1981, the Commission adopted the Rule to provide the criteria and procedures by which certain securities traded exclusively in the OTC market were to be designated as NMS Securities. 4 The Rule employs a two-tiered approach toward NMS designation that is predicated upon the characteristics of certain OTC securities for which quotation information is disseminated in the NASD's electronic interdealer quotation system {"NASDAQ"), 5 Tier 1, which became effective on April 1, 1982, requires that the most actively traded OTC securities be designated as NMS Securities. 6 Tier 2, which became effective on February 1, 1983, permits certain additional actively traded OTC securities to become NMS designated at the election of the issuer.7 Under the less stringent Tier 2 criteria, a far larger group of OTC securities are eligible for designation.8 The primary effect of designating OTC stocks as NMS Securities at the present time is to require that transactions in such securities be reported in a real-time system in accordance with the Commission's last sale reporting rule, 9 and that quotations for such securities be firm as to the quoted price and size in accordance with the Commission's firm quotation rule.10 In adopting the Rule, the Commission determined, among other things, that real-time transaction reporting and firm quotations would increase market efficiency and enhance opportunities for public investors to obtain best execution of their orders.11

      On October 1, 1981, the Commission published for public comment 12 a petition, submitted by the NASD, to relax substantially the Tier 2 designation criteria to allow more issuers of OTC securities to elect NMS status.13

      On January 7, 1982, the Commission deferred final action on the NASD's 1981 petition to expand the criteria for Tier 2 designation.14 The Commission stated that the deferral would help provide an orderly phase-in of Tier 2 securities, and would provide an opportunity to study the effects of transaction reporting on existing NMS Securities before making a final determination on whether to expand the universe of eligible securities.15

      Also on January 7, 1982, the Commission approved the NASD's "National Market System Securities Designation Plan with Respect to NASDAQ Securities" ("Designation Plan") which had been filed pursuant to the Rule.16 Accordingly, the NASD designated the first Tier 1 NMS Securities on April 1, 1982.

      In response to concerns raised by market makers about the onset of last sale reporting in numerous Tier 2 securities at one time, on December 1, 1982, the Commission approved an amendment to the Designation Plan to provide for the phasing in of those securities meeting the Tier 2 voluntary designation criteria. 17The phase-in feature of the Designation Plan provided for the designation of 100 eligible securities per month, and for a suspension in designation between February 8, 1983, and April 29, 1983, while the NASD studied the impact of last sale reporting on the markets for NMS Securities as well as the ability of the NASDAQ system to accommodate the reporting of additional NMS Securities.18

      The NASD's study concluded that NMS designation does not adversely affect market makers or issuers of NMS Securities. Specifically, the NASD's study determined that last sale reporting had no adverse impact on quotation spreads and intraday price volatility after securities became NMS designated, that NMS designation was a factor in increasing NASDAQ volume, and there had been no appreciable decline in market maker participation in NMS Securities. Nonetheless, the NASD recommended a reduction of the number of monthly Tier 2 designations in order to reduce the impact on market makers of increasing numbers of OTC securities becoming subject to last sale reporting in a short period of time.19

      On May 20, 1983, the Commission approved the NASD's proposed modification of the phase-in procedures of the Designation Plan.20 The amendment reduced the number of eligible securities to be designated per month from 100 to 50. The Commission found that the amendment was a reasonable method of minimizing reporting burdens while enabling the NASD to continue to phase—in new NMS designation.21

      II. The NASD's Petition

      On February 10, 1984, the NASD again petitioned the Commission to amend the Rule to increase the number of securities eligible for voluntary designation as NMS Securities.22 In its petition, the NASD asserted that in the two years since the Commission deferred final action on the NASD's 1981 petition,23 the "NASDAQ/National Market System has move from concept to reality." The NASD stated that 727 NASDAQ securities has been designated pursuant to the Rule as of February 1, 1984, and another 149 securities would be designated as NMS Securities in the next three months. As a result, over seventy percent of the approximately 1200 NASDAQ securities eligible for designation under the current Tier 1 and Tier 2 criteria would be designated by the end of April, 1984.24

      The NASD's petition also affirmed the findings of the NASD's February 8-April 29, 1983 NMS Securities study, which found that last sale reporting did not have a detrimental impact on the markets for NMS Securities.25 In particular, the NASD's petition indicated that market makers have not found last sale reporting as burdensome as they had initially feared, and that the NASD has not observed any major decrease in market making or liquidity in NMS Securities.26 Based on these observations and their discussions with traders, issuers, and institutions, the NASD generally concluded that last sale reporting has benefited the issuers of NMS Securities, their shareholders, and members of the investment community, through providing additional information for investment decisions and greater exposure for designated securities.

      In light of its conclusions concerning the benefits of last sale reporting, the NASD reexamined its earlier proposal regarding Tier 2 criteria, and concluded that the Tier 2 criteria should be extended to provide the benefits of last sale reporting to OTC securities eligible for the NASDAQ National List.27 Accordingly, the NASD's petition proposed that the two alternative criteria currently used for inclusion in the NASDAQ National List be used as the Tier 2 designation criteria.28

      The NASD stated that, on average, the companies that meet the NASD's proposed criteria but that do not qualify as NMS Securities under the present Tier 2 criteria have significant financial strength and shareholder interest.29 The NASD also asserted that, as the number of NMS Securities increases, many newspapers will tend to save space by dropping the NASDAQ National List and only publishing information concerning NMS Securities.30 As a result, the NASD argued that many investors in National Last securities that are ineligible for NMS designation would lose their primary source of price information for these securities, and the companies themselves would lose exposure. Consequently, the NASD concluded that unless the NMS criteria were expanded, non-NMS National List companies would be pressured to list on an exchange and seek inclusion in the Consolidated Tape 31 in order to maintain their present level of visibility.

      In this connection, the NASD reiterated its position, expressed in its former petition for expansion of the Tier 2 criteria, that many OTC securities denied NMS designation would qualify for exchange listing on the basis of "substantial compliance" with exchange listing standards,32 and would obtain the benefits of last sale reporting in this manner, to the OTC market's disadvantage. The NASD emphasized that the present Tier 2 volume standards appear especially stringent when compared to the trading experience of many exchange-listed stocks. In particular, the NASD noted that many stocks currently trading on the Amex would not satisfy the present Tier 2 trading volume requirement of 100,000 shares a month.33

      The NASD further asserted that the market characteristic standards currently part of the Rule's Tier 2 criteria, such as minimum price per share and monthly trading volume, are unnecessary to ensure that only appropriate securities are designated as NMS Securities. The NASD claimed that the issuer's ability to choose, based on advice from its market makers and investment bankers, whether to have its security designated under the Tier 2 NMS standards generally will prevent securities unlikely to benefit from last sale reporting from being designated as NMS Securities.34

      The NASD's petition proposed two alternative sets of Tier 2 criteria, identical to the National Lists' present criteria. The first alternative criteria, applicable to newer companies with substantial net income but less extensive assets, would require that the issuer have net income in the previous fiscal year, or in two of the last three fiscal years, of $300,000, and at least 350,000 publicly held shares with a market value of $2,000,000. This alternative also would require a minimum bid price per share of $3 and a minimum of two NASDAQ market makers in the stock for five business days prior to the application date.

      The NASD's second alternative criteria, applicable to longer-established companies with substantial assets but low net income, would require that the issuer have operated for four years, have capital and surplus of $8,000,000, and have at least 800,000 publicly held shares with a market value of $8,000,000. This second alternative also would require a minimum of two NASDAQ market makers for five business days before the application date, but would impose no minimum price per share requirement.

      The NASD also proposes for both alternatives an accompanying reduction in the Designation Plan's maintenance standards for continued NMS designation. The NASD proposes to reduce the maintenance standard's market maker requirement from three to two, and to eliminate the present $1,000,000 annual dollar trading volume requirement.

      III. Discussion

      When the Rule was initially adopted, the Commission employed restrictive criteria for designation of OTC securities as NMS Securities, at least partly in response to the serious concerns expressed by commentators regarding the potential impact of last sales reporting on the OTC market. In both its proposal and its deferral of the NASD's initial petition for extension of the Tier 2 standards, however, the Commission indicated its belief that an expansion of the Tier 2 criteria might be desirable,35 if there were no significant problems with last sale reporting the NMS Securities designated under existing standards.

      A. Reporting Procedures. As the NASD emphasized in its current petition, it appears that the phase-in of last gale reporting for Tier 2 NMS Securities has taken place smoothly, without significant disruption of the markets, impaired liquidity, or reduction in market maker participation in NMS Securities. 36Moreover, the NASD has indicated that its surveillance of OTC trade reporting and inspections of market makers have not shown any significant problems with the quality of NMS trade reporting generally. The NASD also has indicated that the OTC traders represented on its various committees now strongly support extension of last sale reporting to additional OTC securities. In contrast, the previous NASD petition to expand the Tier 2 criteria, submitted before any experience with OTC last sale reporting had been obtained , was strongly opposed by the OTC market maker community.37
      The concerns expressed formerly by OTC market makers regarding the possibility of reduced liquidity from last sale reporting do not appear to have materialized. Moreover, the reporting by market makers of trades in NMS Securities appears to have been generally accurate in nature. Nonetheless, the Commission believes that improvement is needed in certain aspects of the last sale reporting process. In particular, it appears that the last sale reporting during peak volume periods, such as the first and last hours of trading, may be somewhat less accurate and timely than reporting during other times, due to the added pressures on traders during these periods. For further gains in trade reporting quality, reduced reliance on reporting by traders appears necessary.
      The press of reporting by traders during peak volume periods may be reduced by greater use by market maker firms of existing automation facilities, and development of additional systems. For instance, the NASD's existing computer-to-computer interface, which allows trade reporting to the NASD directly through clerical input of trade reports into the market maker's internal order handling system, offers an effective means of enhancing trade reporting. Alternatively, additional clerical support could be employed to relieve traders of the task of reporting through NASDAQ terminals. Moreover, the NASD's proposed Small Order Execution System, which will automatically execute and report trades of 300 shares or less at the inside market price, should further aid reporting accuracy. Automatic reporting of a large segment of small orders, which compose a substantial part of all OTC trades, could reduce the burdens on traders and thus significantly improve reporting quality.38
      While the Commission recognizes that NMS transaction reporting on the whole has been generally accurate, the Commission believes that additional procedures and systems mu3t be put into place to enhance further the quality of trade reporting during peak periods. Accordingly, the Commission encourages OTC market makers and the NASD to strive for continued improvements in trade reporting.
      Notwithstanding the need for further improvements, the Commission believes that trade reporting for NMS Securities has enhanced pricing efficiency and opportunities for improved execution of customer orders. Therefore, in view of the generally positive experience to data with last sale reporting in NMS Securities, the Commission preliminarily believes that a substantial expansion of the range of securities eligible for Tier 2 designation may be appropriate. Accordingly, the Commission, in response to the NASD's petition, is publishing for comment the two alternative Tier 2 criteria proposed by the NASD, which incorporate the NASD's present National List criteria.
      B. Revised Designation Criteria. With respect to the NASD's proposed criteria, it should be noted that a National List security only would be designated as an NMS Security at the election of the issuer. Hence, eligible securities would not become subject to the last sale reporting requirements of the Rule if the issuer concluded, possibly based on the advice of its investment bankers and market makers, that the markets for the security would not benefit from last sale reporting. Moreover, the NASD's proposal would not affect the Rule's Tier 1 criteria; the automatic designation of NMS Securities would continue to apply to only the most actively traded and liquid OTC securities.
      The Commission notes, however that the criteria proposed by the NASD represent a change in the rationale for Tier 2 standards as well as a reduction in the level of certain of these standards. By dropping Tier 2's present average trading volume requirement for both of its alternatives, and the present price per share requirement for the second of its alternatives, the NASD's proposal focuses primarily on the nature of the issuer rather than on the trading characteristics of the security.
      The Commission recognizes that exchange listing standards typically center on issuer characteristics rather than trading market characteristics in determining eligibility for exchange listing.39 Moreover, the Commission recognizes that criteria such as assets, market value, and number of public shareholders often are useful indicators of securities with deep and liquid markets. Nonetheless, trading market standards were included in the Rule to ensure that securities designated under the Rule have the extensive investor following and liquid markets necessary for trading in the broader national market system, as envisaged in Section UA(a)(2) of the Act.40 In the absence of these standards, low priced or inactively traded NASDAQ securities could be designated as NMS Securities and become subject to last sale reporting.
      1. Bid Price. The Commission requests comment whether in the absence of trading market standards, NMS designation may be used by issuers of speculative low priced "hot issue" stocks to achieve extra prominence. In particular, the Commission requests comment whether in this way, issuers of speculative stocks could obtain extensive national exposure and use their NMS status to further promote their trading activity.41 The Commission also questions whether speculative low priced securities should be recognized and promoted as NMS Securities.
      The Commission therefore requests comments on whether the low-priced National List securities which would be eligible for NMS designation under the NASD's proposed amendments are suitable for NMS designation. 42The Commission also requests comment on the appropriateness of eliminating the minimum price requirement from the Rule's Tier 2 standards. In this connection, the Commission requests commentators to consider whether some minimum price standard, such as the present $5 minimum bid price, should continue to be part of the Tier 2 standards.
      2. Trading Volume. The Commission also requests comment on whether Tier 2's minimum trading volume requirement should be eliminated as the NASD proposed. In this connection, the Commission requests comment on whether some lower trading volume standard such as 50,000 shares a month for six months is appropriate to ensure that all NMS Securities are actively traded. '"The Commission also solicits comment on whether a minimum trading volume requirement should be retained in the maintenance requirements of the NASD's Designation Plan in order to remove wholly inactive securities from the list of NMS Securities.
      3. Number of Market Makers. Comment is also requested regarding the reduction of the required number of market makers from four to two as proposed by the NASD. In particular, the Commission seeks comment on whether a stock with only two competing market makers demonstrates sufficient nationwide investor interest and trading activity to justify inclusion in the national market system. In this connection, it appears that the securities with only two market makers frequently have substantially wider spreads than securities with four or more market makers.44
      Furthermore, the Commission notes that the NASD indicated that the securities meeting its proposed standards had an average of six market makers per security. Therefore, the retention of a four market maker standard would not appear to exclude a large proportion of those securities that otherwise satisfy the proposed standards.45 In view of these factors, the Commission solicits comment on the difference in the quality of markets for securities with two market makers as compared to those with four market makers, and on whether the four market maker requirement should be reduced as the NASD proposed.
      The Commission also solicits comments regarding the impact of last sale reporting on National List Securities not currently eligible for NMS designation. In particular, the Commission solicits comment on whether the adoption of the NASD's proposed amendments could result in benefits for National List securities designated under the Rule, in terms of increased numbers of market makers, increased liquidity, or reduced spreads. The Commission also requests comment on whether the exclusion of certain National List securities from voluntary NMS designation would result in a reduction in the number of market makers, a decrease in liquidity, or an increase in bid-ask spreads for these securities.
      C. Reporting Costs. Finally, the Commission invites OTC market makers and others to comment on the potential impact on the OTC markets of the NASD's proposed expansion of the number of securities eligible for NMS designation. In particular, the Commission requests comment regarding the volume of trades in securities eligible for last sale reporting under the proposed criteria, including estimates of how trading volume in these securities compares to trading volume in present NMS Securities. With respect to this estimated trading volume, comment is solicited regarding the costs imposed on market makers of reporting these additional trades, and whether accommodation of this increase would necessitate major systems or other changes.46

      IV. Summary of the Initial Regulatory Flexibility Analysis

      The Commission has prepared an Initial Regulatory Flexibility Analysis ("IRFA"), pursuant to the requirements of the Regulatory Flexibility Act " regarding the proposed amendments to the Rule HAa2-l. The IRFA indicates that the proposed amendments solicit comment on expansion of the number of OTC securities eligible for NMS designation from the present 1,200 to 2,525. The IRFA notes that the principal effect of this expansion would be to require broker-dealers to report trades on a real-time basis in these additional securities. The IRFA also notes that while last sale reporting in these additional securities could impose costs on broker-dealers of reduced trader efficiency, increased clerical costs, and possibly systems enhancements, these costs may be limited in view of the small incremental trading volume in the additional securities eligible for designation under the proposal, compared to securities designated previously. However, the Commission is soliciting comment on the extent of this reporting volume and the resulting costs for broker-dealers. In addition, the IRFA notes that the proposed amendments may provide off-setting benefits to investors and the markets in terms of increased pricing efficiency and opportunities for improved executions.

      A copy of the IRFA may be obtained by contacting Andrew E. Feldman, (202) 272-2383, Division of Market Regulation, Securities and Exchange Commission, 450 Fifth Street, NW.. Washington, D.C. 20549.

      List of Subjects in 17 CFR Part 240

      Reporting and recordkeeping requirements, Securities.

      V. Statutory Basis and Text of the Amendments

      Pursuant to the Securities Exchange Act of 1934 and particularly Suction HA(a)(2) and 23(a) thereof, 15 U.S.C. 78k-l(a)(2) and 78w(a), the Commission proposes to emend § 240.1lAa2-l in Chapter II of Title 17 of the Code of Federal Regulations, by revising paragraph (b)(2)(i) and amending the first sentence of paragraphs (b)(2)(iii), by revising paragraph (b)(4)(ii) and adding a new paragraph (b](1)(iii). and by redesignating current paragraph (b)(4)(iii) as (b)(4)(iv), as follows:*

      PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934

      § 240.11Aa2-1 Designation of national market system securities.

      * * * * *

      (b) Designation criteria.

      * * *

      (2) Any NASDAQ security not described in paragraph (b)(l) of this section which
      (i) Substantially meets the criteria set forth in paragraph (b)(4)(ii) or (b)(4)(iii) of this section ("Tier 2 criteria");
      (ii) * * *
      (iii) Is a warrant to subscribe to a security described in paragraph (b)(l) or (b)(2)(i) of this section and meets the criteria set forth in paragraph (b)(4) [(iii)] (iv) of this section ("Warrants") * * *
      (3) * * *
      (4) * * *
      (ii) Tier 2 Criteria. —Alternative 1
      (A) The issuer of the security [has net tangible assets of at least $2,000,000 and capital and surplus of at least $1,000,000] > had annual net income of at least $300,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years.
      (B) There are at least [250,000] 350,000 publicly held shares.
      (C) The market value of publicly held shares is at least [$3,000,000] $2,000,000.
      (D) The pries per share on each of the five business days prior to the date of application by the issuer is [$5] $3 or more.
      [(E) The average volume of trading per month for the six month period preceding the date of application by the issuer is 100,000 shares or more.]
      [F] E At least [four] two dealers act as NASDAQ market makers with respect to the security on each of the five business days preceding the date of application by the issuer.
      >(iii) Tier 2 Criteria.—Alternative 2
      (A) The issuer of the security has capital and surplus of at least $8,000,000.
      (B) There are at least 800,000 publicly held shares.
      (C) The market value of publicly held shares is at least $8,000,000.
      (D) At least two dealers act as NASDAQ market makers with respect to the security on each of the five business days preceding the date of application by the issuer.
      (E) The issuer has a four year operating history. [(iii)]/div>
      (iv) Warrants.

      * * * *

      By the Commission.

      George A. Fitzsimmons,
      Secretary.

      April 30, 1984.

      EXHIBIT A

       

      Current SEC tier 2 criteria

      191 NASD proposal for tier 2 criteria

      1984 NASD proposal for tier 2 criteria

      Maintenance criteria

      Alternative
      1

      Alternative
      2

      Alternative
      1

      Alternative
      2

      Current

      Proposed

      Not tangible assets

      $2,000,000

      $4,000,000

      $12,000,000

      $

      $

      $

      $

      Capital and surplus

      $1,000,000

           

      $8,000,000

      *$1,000,000

      *$1,000,000

      Publicity-held shares

      250,000

      400,000

      1,000,000

      350,000

      800,000

      200,000

      200,000

      Market value of publicity-held shares

      $3,000,000

      $3,000,000

      $10,000,000

      $2,000,000

      $8,000,000

      $2,000,000

      $2,000,000

      Price per share

      $5

      $5

       

      $3

           

      Average monthly share trading volumes

      100,000

                 

      Market makers

      4

      4

      4

      2

      2

      3

      2

      Annual net income in the previous fiscal year or in 2 of the last 3 fiscal year

       

      $4,000,000

       

      $3,000,000

       

      *$2,000,000

      *$2,000,000

      Annual dollar trading volume

       

      $1,000,000

      $1,000,000

         

      $1,000,000

       

      Years in operation

         

      5

       

      4

         

      *Either can be met.

      [FR Doc. 84-12280 Filed 5-4-84; 8:45am]

      BILLING CODE 80 10-01-M


      1 17 CFR § 240.11Aa2-l. See Securities Exchange Act Release No. 17549 (February 17,1S81). 46 FR 13892 ("Rule HAa2-l Adoption Release").

      2 15 U.S.C. S § 78a et seq., as amended by the Securities Acts Amendments of 1975 ["1975 Amendments"). Pub. L No. 94-29 (June 4, 1975), W Stat. 97, [19751 U.S. Code Cong. & Ad. News 97.

      3 Senate Comm. on Banking, I lousing A Urb. Affs., Report to Accompany S. 249: Securities Acts Amendments of 1975, S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (Comm. Print 1975) ("Senate Report"), reprinted in, [1975] U.S. Code Cong. & Ad. News 179,185.

      4 For more extensive discussion of the background of Rule 11aZ-1, see Securities Exchange Act Release No. 15926. (June 15, 1979), at 2-13. 44 FR 36912, 36312-14 ("Rule HAa2-l Proposal Release")

      5 Although the Rule defines a national market system security as "any equity security which is designated as qualified for trading in a national market system," the current two-tier approach makes only NASDAQ securities eligible for designation. The Rule, moreover, provides for the removal of the NMS designation "[i]f such security becomes listed and registered, or admitted to unlisted trading privileges, on an exchange." 17 CFR § 240.1lAa2-a(a), (b).
      In adopting the Rule, the Commission concluded that imposing NMS qualification criteria upon listed securities was unnecessary at that time because most listed securities already were included in national market system last sale and quotation disclosure facilities, and selection of less than all reported securities as NMS Securities could create unwarranted distinctions among these securities. Nonetheless, the Commission specifically left open whether exchange traded securities should be designated as NMS Securities in the future. See Rule II Aa2-1 Adoption Release, supra note 1, 48 FR at 13994, 95. In view of the proposed substantial expansion of the class of OTC securities eligible for NMS designation, the Commission requests comment on whether exchange traded securities should now be designated as NMS Securities, and, in particular, whether the proposed OTC standards should be applied in similar fashion to exchange trade securities, or whether some other classification criteria, such as stock traded through the Intermarket Trading System, should be established.

      6 17 CFR § 240.11 Aa2-l(b)(4)(i). The current Tier 1 criteria for mandatory NMS designation require that the issuer of the NASDAQ security must have net tangible assets of at least $2,000,000 and capital and surplus of at least $1,000,000. In addition, there must be at least 500,000 publicly owned shares of stock outstanding, and the market value of the publicly-held shares must total at least $5,000,000. Furthermore, the price per share must be $10 or more, the average trading volume per month must be at least 800,000 shares, and there must be at least four NASDAQ market makers in the security.

      7 17 CFR § 240.11Aa2-l(b)(4)(ii). The current Tier 2 criteria for NMS designation require that the issuer have net tangible assets of at least $2,000,000 and capital and surplus of at least $1,000,000. In addition, there must be at least 250,000 publicly owned shares and the market value of the publicly-held shares must be at least $3,000,000. Furthermore, the price per share must be $5 or more, the average trading volume per month must total 100,000 shares, and there must be at least four NASDAQ market makers in the security.

      8 There currently are approximately 236 Tier 1 NMS Securities and 645 Tier 2 NMS Securities. An additional 204 OTC securities are eligible for designation under the present NMS Tier 2 criteria.

      9 17 CFR § 240.11Aa3-l.

      10 17 CFR § 240.11Ad-l.

      11 See Rule HAa2-l Adoption Release, supra note 1, 48 FR at 13996.

      12 See Securities Exchange Act Release No. 18131 (October 1, 1901), 46 FR 49594 ("1981 Petition Proposal Release").

      13 Specifically, the NASD proposed two alternative sets of Tier 2 criteria that it claimed were based generally on the listing standards of the American Stock Exchange. Inc. ("Amex"). One set of criteria would cover relatively smaller companies that had a history of earnings, while the other set of criteria would cover relatively larger companies that had a substantial operating history, although their recent operations may not have been profitable. The NASD estimated that a total of approximately 800 additional OTC securities would be eligible for designation under these standards at that time. Letter from S. William Broka, Secretary, NASD, to George A. Fitzsimmons, Secretary, SEC (July 24, 1981) ("1901 NASD Proposal"). (The NASD estimates that approximately 500 additional securities would be eligible under these standards now.)

      14 Securities Exchange Act Release No. 18397 (January 7, 1982), 47 FR 2079 ("Deferral Release").

      15 Id 14. 47 FR at 2082.

      16 Securities Exchange Act Release No. 18399 (January 7, 1982), 47 FR 2226. The NASD's Designation Plan generally provides procedures for designating NMS Securities, determining substantial compliance with the designation criteria, and publishing lists of designated securities. The plan also establishes maintenance criteria for NMS Securities, and criteria for terminating or suspending the designation of NMS Securities.

      17 Securities Exchange Act Release No. 19286 (December 1, 1982), 47 FR 55357.

      18 Id.

      19 See Securities Exchange Act Release No. 19797 (May 20, 1983), 48 FR 24823.

      20 Id.

      21 Id.

      22 Letter from S. William Broka, Secretary, NASD, to George A. Fitzsimmons, Secretary, SEC, (February 10, 1984).

      23 For a discussion of the NASD's 1981 petition, see supra notes 12-15 and accompanying text.

      24 The number of present and proposed NMS Securities are as follows:
      Present NMS Securities: Tier 1-236, Tier 2-645/Total = 881.
      Additional NMS Securities as of May 31, 1984: 44/Total = 925.
      NMS eligible securities that have not elected designation: 250/Total NMS-eligible securities: 1.175.
      Total National List (excluding NMS): 1,788.
      Total National List securities presently ineligible for NMS: 1,444.
      National List securities NMS-eligible under the NASD's current proposal: 1.300-1,350.
      National List securities not eligible under NASD's proposal: 94-144.
      Total NMS-eligible securities under NASD's proposal: 2,475-2,525.

      25 For a discussion of the NASD's 1983 study, see, text accompanying notes 18-19, supra.

      26 In a separate letter providing further information on the trading experience of NMS Securities, the NASD said that the sixteen NMS Securities with the lowest trading volume in December , 1983 had lost an average of .88 market makers since the start of last sale reporting. The NASD noted, however, that all sixteen companies underwent a considerable decline in volume after they qualified for the NMS, and that in these conditions both NMS and non-NMS Securities tend to lose market makers. Letter from John T. Wall. Executive Vice President, NASD, to Brandon Becker, Assistant Director. SEC (February 10, 1984) ("NASD February 1964 Letter").

      27 For purposes of providing the media with information on NASDAQ securities, the NASD identifies a "National List" of major issues trading in NASDAQ, and an "Additional List" of other active NASDAQ securities. The National List, determined primarily on the basis of issuer financial criteria, as described below, currently contains approximately 1,788 issues: the Additional List, determined on the basis of dollar trading volume, contains another 1,000 issues. In November 1980, the NASD adopted the present National List criteria, reflecting issuer quality, in place of its previous dollar trading volume criteria, to reduce the List's focus on high trading volume and to include more major NASDAQ companies with substantial assets but only moderate trading activity. See. The NASDAQ Securities Fact Book, 1981.

      28 The NASD also recently requested the Board of Governors of the Federal Reserve System ("Federal Reserve Board") to amend its margin regulations to give automatic marginability to securities on its National List. For OTC securities to be eligible for margin at present, they must appear on the Federal Reserve's OTC Margin List. The Federal Reserve recently proposed amendments to its regulations that would give automatic marginability only to NMS Securities. Federal Reserve Docket R-0512. 49 FR 9741.

      29 The NASD states that, as of January 27, 1984. the typical company meeting the National List criteria but not the present Tier 2 criteria had an average price of $13%, an average number of publicly-held shares of 2.414,388, an average market value of these shares of $38,499,634, and average net income of $3,591,862. See NASD February 1984 Letter, supra note 26, at 7.

      30 The NASD noted that at present only the Wall Street Journal carries the NASD's full "Additional List," and only two other newspapers carry the "Additional List" in part.

      31 The Consolidated Tape, operated by the Consolidated Tape Association ("CTA"), compiles current last sale reports in listed securities from all exchanges and market makers trading the securities and disseminates these reports to vendors on a consolidated basis. The CTA is composed of the New York ("NYSE"), Amex, Boston, Cincinnati. Midwest. Pacific and Philadelphia Stock Exchanges, and the NASD. The NASD argued that National List companies would qualify for inclusion in the Consolidated Tape either by satisfying the CTA inclusion criteria directly or on the basis of a determination by one of the exchanges that the security "substantially complied" with the CTA's inclusion standards.

      32 Most exchange listing standards permit the exchange to list securities that do not satisfy completely the exchange's explicit listing standards if these securities are deemed to be in "substantial compliance" with those standards.

      33 See Letter from John T. Wall. Executive Vice President. NASD, to Richard Ketchum, Associated Director SEC, (March 13, 1984). It should be noted, however, that in both exchange and OTC markets, including the NMS Securities markets, securities often fall below the initial listing standards after they become listed, and yet are only removed if they fail to meet the market's ongoing maintenance standards.

      34 However, if the issure's designation decision is based primarily on the greater exposure obtained as an NMS Company, it is possible that an issuer may elect NMS designation even though the markets for its securities may not benefit from last sale reporting.

      35 See 1981 Petition Proposal Release, supra note 12, at 3, 46 FR 49594: Deferral Release, supra note 14. at 5, 47 FR at 2080.

      36 As the NASD pointed out in its February 1984 Letter, the phase-in of last sale reporting in Tier 2 securities over the past months was eased by the recent slowdown in general OTC market activity, and the lower level of trading volume in the most recently designated Tier 2 securities. See NASD February 1984 Letter, supra note 28, at 3.

      37 In general, OTC market makers commenting on the previous NASD petition expressed concern that OTC last sale reporting would raise the clerical costs of market making, and would reduce the liquidity of the OTC market for large blocks of stocks. These market makers argued that realtime reporting of large traders would notify competing market makers when a position was taken, possibly resulting in changes in the market price, thus increasing the risk of the market maker making the trade. See Deferral Release, supra note 14. at 8; 47 FR at 2081.

      38 In addition, the Commission understands that the NASD and the National Security Traders Association ("NSTA") are considering proposing changes in the present NASD reporting requirements to allow trade reports executed within 60 seconds to be aggregated up to a total of 9.999 shares and reported at one time, in order to further ease the task of reporting all trades promptly during peak periods.

      39 Neither the Amex nor the NYSE sets a minimum trading volume requirement for listing. The Amex, but not the NYSE. impose a minimum price per share listing requirement of $5; however the Amex will consider listing securities with lower bid price in a variety of situations. See Amex Company Guide § 102(b), NYSE Company Manual § 102.01.

      40 The Senate Report on the 1975 Amendments described securities qualified for trading in the national market system in terms of trading characteristics "trading volume, price, and number of stockholders." See Senate Report, supra note 3, at 18. Similarly, in the Rule HAa2-l Proposal Release, the Commission emphasized the need for market criteria to ensure that NMS Securities were of national investor interest and would benefit from the enhanced competitive atmosphere resulting from last sale reporting. See, Rule 11Aa2-l Proposal Release, supra note 4, at 4, 44 FR at 36918.

      41 The use of extensive publicity measures, as well as other devices, to promote trading activity in hot issues is discussed in the statement of John S. R. Shad, Chairman, and John M. Fedders, Director, Division of Enforcement, of the SEC, before the Subcommittee on Securities of the Senate Committee on Banking. Housing, and Urban Affairs, (December 15, 1983).

      42 The Commission notes that data collected by the staff of the Federal Reserve Board in connection with their consideration of automatic marginability for OTC securities indicates that, as of February 21, 1984 83 of the then 1.715 National List stocks had less than a $5 bid price. See Staff Memorandum from the Division of Supervision and Regulations and the Division of Research and Statistics to the Board of Governors of the Federal Reserve System (February 27, 1984) ("Federal Reserve Memo").

      43 The NASD had indicated to the Commission that in the first quarter of 1984 approximately 52% of its present National List securities had trading volume of over 50,000 shares per month.

      44 The Federal Reserve Memo indicated that of the National List securities with two market makers as of July 13, 1983, over fifty percent had bid/ask spreads in excess of one dollar. See Federal Reserve Memo, supra note 42, at 15.

      45 Data provided by the Federal Reserve Board staff indicate that, as of February 21, 1984.191 of the 1,715 National List Stocks had less than four market makers. See Federal Reserve Memo, supra note 42, at Table 3.

      46 The Commission notes that the NASD indicated that, if the Rule were amended, it would consult with the NSTA regarding an appropriate phase-in program for the additional qualifying securities. In this connection, the Commission also solicits comment whether, in the event the universe of Tier 2 securities were expanded m whole or In part as the NASD proposed, the Designation Plan's Tier 2 phase-in procedures should be continued to spread out the number of Tier 2 securities designated at one time and reduce the burden of a sudden increase in reporting obligations for market makers.

      47 5 U.S.C. 601 et sec.

      * Note.—Arrows indicate text proposed to be added. Brackets indicate text proposed to be deleted.


    • 84-25 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the first quarter of 1984. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D. C. 20006.

      Notice Number

      Date

      Topic

      84-1

      January 9, 1984

      National Market System to Expand to 728 Issues January 17; and Year-End NASDAQ Market Highlights

      84-2

      January 13, 1984

      12 Securities Mandated Into NMS on February 17

      84-3

      January 24, 1984

      Temporary Relief From Certain Provisions of Rules 15c-3-l and 15e3-3 Dealing With Registered Municipal Securities Is Extended Until March 31, 1984, By SEC Staff

      84-4

      January 23, 1984

      National Market System Grows to 789 Securities with 50 Additions on February 14

      84-5

      January 25, 1984

      SIPC Trustee Appointed for Jay W. Kaufmann & Co., New York

      84-6

      January 25, 1984

      Temporary Regulations Under The Interest and Dividend Tax Compliance Act of 1983; Back-Up Withholding

      84-7

      January 30, 1984

      SEC Staff Interpretations of Rule 15c2-4

      84-8

      February 3, 1984

      Temporary Receiver Appointed For Southeast Securities of Florida, Hoboken, New Jersey

      84-9

      February 3, 1984

      SIPC Trustee Appointed for California Municipal Investors, Inc., Los Angeles, California

      84-10

      February 3, 1984

      Holiday Settlement Schedule - February 1984

      84-11

      February 3, 1984

      SIPC Trustee Appointed for Gattini & Co., New York, New York

      84-12

      February 8, 1984

      Quarterly Checklist of Notices to Members

      84-13

      February 10, 1984

      PLATO Learning Center ShutDown March 3-11; Extensions of Qualification Examination Expiration Dates

      84-14

      February 15, 1984

      SIPC Trustee Appointed for Southeast Securities of Florida, Inc., Hoboken, New Jersey

      84-15

      February 28, 1984

      National Market System Grows to 834 Securities with 50 Additions on March 20

      84-16

      March 1, 1984

      Revised Rates for TARS

      84-17

      March 13, 1984

      Mail Vote - Amendment to Association's Rules of Fair Practice

      84-18

      March 16, 1984

      Holiday Settlement Schedule - April 1984

      84-19

      March 16, 1984

      SIPC Trustee Appointed for MV Securities, Inc., New York, New York

      84-20

      March 28, 1984

      National Market System Grows to 881 Securities with 50 Additions on April 17

      * * * *

    • 84-24 Memorial Day Trade Date — Settlement Date Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Monday, May 28, 1984, in observance of Memorial Day. "Regular Way" transactions made on the business days noted below will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      May 21

      May 29

      May 31

      22

      30

      June 1

      23

      31

      4

      24

      June 1

      5

      25

      4

      6

      28

      Markets Closed

      29

      5

      7

      The foregoing settlement dates should be used by brokers, dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6256.


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-23 National Market System Grows to 935 Securities With 50 Additions on May 15

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, May 15, the National Market System will include 935 securities as 50 more NASDAQ securities are phased into the System. These 50 securities meet the SEC's voluntary designation criteria, which include six month average trading volume of 100,000 shares a month and a minimum bid price of $5.

      The 50 securities scheduled to join NMS on May 15 are:

      Symbol

      Company

      Location

      ABPC

      Alaska Pacific Bancorporation

      Anchorage, AK

      ALMI

      Alpha Microsystems

      Irvine, CA

      BBDO

      BBDO International, Inc.

      New York, NY

      BIWC

      BIW Cable Systems, Inc.

      Boston, MA

      BOKC

      BANCOKLAHOMA Corp.

      Tulsa, OK

      BKVT

      BANKVERMONT Corporation

      Burlington, VT

      BESI

      Besicorp Group, Inc.

      Ellenville, NY

      BIND

      Bindley Western Industries, Inc.

      Indianapolis, IN

      CBAN

      Central Bancorporation, Inc. (The)

      Cincinnati, OH

      CMPC

      Compucare, Inc.

      McLean, VA

      BUGS

      CooperBiomedical, Inc.

      Palo Alto, CA

      COPY

      CopyTele, Inc.

      Huntington Station, NY

      DVON

      Devon Stores Corp.

      Carle Place, NY

      DICN

      Dieeon Electronics, Inc.

      Irvine, CA

      EAIR

      Empire Airlines, Inc.

      Oriskany, NY

      EMTH

      Energy Methods Corporation

      Denver, CO

      FTEC

      FilmTec Corporation

      Minneapolis, MN

      GAMA

      Gamma Biologicals, Inc.

      Houston, TX

      GRAC

      GRACO Inc.

      Golden Valley, MN

      HISI

      Health Information Systems, Inc.

      Brooklyn, NY

      HOOK

      Hook Drugs, Inc.

      Indianapolis, IN

      HRZN

      Horizon Industries, Inc.

      Calhoun, GA

      ILCT

      ILC Technology, Inc.

      Sunnyvale, CA

      IGEN

      ImmunoGenetics, Inc.

      Vineland, NJ

      IDYN

      Interdyne Company

      Milpitas, CA

      INTF

      Interface Systems, Inc.

      Ann Arbor, MI

      MTSC

      MTS Systems Corporation

      Eden Prairie, MN

      MDSN

      Madison Gas and Electric Company

      Madison, WI

      MALR

      Malrite Communications Group, Inc.

      Cleveland, OH

      MRCS

      Marcus Corporation (The)

      Milwaukee, WI

      MYLN

      Mylan Laboratories, Inc.

      Pittsburgh, PA

      NHCC

      National Health Corporation

      Murfreesboro, TN

      NESA

      Northeast Savings, F.A.

      Schenectady, NY

      ORSI

      Object Recognition Systems, Inc.

      Princeton, NJ

      PREW

      Preway, Inc.

      Wisconsin Rapids, WI

      QUIX

      Quixote Corporation

      Chicago, IL

      RAXR

      Rax Restaurants, Inc.

      Columbus, OH

      RENL

      Renal Systems, Inc.

      Minneapolis, MN

      RHDS

      Rhodes, Inc.

      Atlanta, GA

      RBSN

      Robeson Industries Corporation

      Mineola, NY

      SPDC

      S-P Drug Co., Inc.

      Brooklyn, NY

      SRVI

      SERVICO, Inc.

      West Palm Beach, FL

      SOTR

      SOUTHTRUST Corporation

      Birmingham, AL

      SONO

      Sonoco Products Company

      Hartsville, SC

      STAK

      Steak N Shake, Inc.

      Indianapolis, IN

      SUNI

      Sun Coast Plastics, Inc.

      Sarasota, FL

      USDC

      U.S. Design Corporation

      Lanham, MD

      USTR

      United Stationers Inc.

      Maywood, IL

      WMIC

      Western Microwave, Inc.

      Sunnyvale, CA

      ZEGL

      Ziegler Company, Inc. (The)

      West Bend, WI

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Jordon S. Macklin
      President

    • 84-22 10 Securities Mandated to Join NMS on May 8, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      An additional 10 securities will join the 880 already trading in the NASDAQ National Market System on Tuesday, May 8, 1983. (The 880 include the 50 issues scheduled to join NMS on April 17.) These securities have met the NMS mandatory designation requirements, which include an average trading volume of 600,000 shares a month for six months and a bid price of $10 on the last five business days in March. As required by SEC Rule HAa2-l, all issues meeting the mandatory designation criteria at the end of each quarter automatically are added to the National Market System within 45 days of the quarter ending date.

      The 10 securities joining NMS on Tuesday, May 8 are:

      SYMBOL

      COMPANY

      LOCATION

      AMKG

      Amosking Bank Shares, Inc.

      Manchester, NH

      ASAL

      Atlantic Federal Savings and Loan Association of Fort Lauderdale

      Fort Lauderdale, FL

      CFSF

      Coast Federal Savings and Loan Association

      Sarasota, FL

      GFED

      Georgia Federal Bank

      Atlanta, GA

      MENT

      Mentor Graphics Corporation

      Beaverton, OR

      MRGC

      Mr. Gasket Company

      Brooklyn Heights, OH

      PROV

      Provident Institution for Savings in the Town of Boston (The)

      Boston, MA

      SOCS

      Society for Savings (The)

      Hartford, CT

      SFIN

      Southland Financial Corporation

      Irving, TX

      VLID

      Valid Logic Systems Incorporated

      Mountain View, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-21 Adoption of a New Rule of Fair Practice and Other Amendments Regulating Activities of Members Experiencing Financial or Operational Difficulties

      TO: All NASD Members

      On February 17, 1984, the Securities and Exchange Commission ("Commission" or "SEC") approved 1/ new Article III, Section 38 of the Association's Rules of Fair Practice, an Explanation of the Board of Governors, and an amendment to the Code of Procedure for Handling Trade Practice Complaints ("Code of Procedure"). These rule changes are designed to regulate the activities of members experiencing financial or operational difficulties. The rule changes are being declared effective as of the date of this notice. A summary of the major provisions and text of the rule changes follow.

      The rule changes were developed as a result of the recommendation of the Commission staff and related to the Commission's determination to lower certain minimum net capital requirements and to relax other provisions of the SEC net capital rule. 2/ The Commission apparently reasoned that lower net capital requirements should be offset by an increase in the ability of the Association to respond quickly in a situation involving a deteriorating financial or operational difficulty. Thereafter, the Association developed Section 38 and an Explanation thereunder and published them for comment in Notice to Member 82-45 (August 19, 1982) and for membership vote in Notice to Members 83-47 (August 18, 1983). Amendments to the Code of Procedure were also published.

      MAJOR PROVISIONS

      As approved by the Commission, Section 38 addresses two levels of possible financial or operational difficulties. First, it restricts a member from expanding its business whenever certain early warning criteria relating to minimum net capital, ratios or scheduled capital withdrawals are exceeded. Secondly, it covers a deteriorating situation in which another set of warning criteria with lower tolerances are exceeded. In such situations, the rule requires a member to reduce or eliminate certain facets of its business.

      Following new Section 38 is an Explanation of the Board of Governors which includes examples of conditions which might cause the Association to determine that a member is in or approaching financial or operational difficulties and possible remedial actions. The examples in the Explanation are only intended to facilitate members' understanding of how the rule will be administered and should not be construed as all-inclusive.

      In conjunction with the Section 38, the Commission also approved amendments to the Code of Procedure. 3/ These amendments provide for procedures to implement the provisions of Section 38 and include the creation of a Surveillance Committee of the Board and District Surveillance Committees to direct the implementation of the rule. The procedures also provide a member with an opportunity for an impartial hearing, an independent review by the Board of Governors, and appeal to the Securities and Exchange Commission.

      * * * *

      Questions concerning the Notice may be directed to Thomas Cassella, Director, Financial Responsibility, at telephone number (202) 728-8237, or Dennis C. Hensley, Vice President and Deputy General Counsel, at telephone number (202) 728-8245.

      Very truly yours,

      Frank J. Wilson
      Executive Vice President and General Counsel

      Attachment

      Article III, Section 38 of the Rules of Fair Practice 1/

      Section 38: Regulation of Activities of Members Experiencing Financial or Operational Difficulties

      (a) Application - For the purposes of this rule, the term "member" shall be limited to any member of the Association who is not designated to another self-regulatory organization by the Securities and Exchange Commission for financial responsibility pursuant to Section 17 of the Securities Exchange Act of 1934 and Rule 17d-l thereunder. Further, the term shall not be applicable to any member who is subject to paragraphs (a)(2) and (a)(3) of SEC Rule 15c3-l, or is otherwise exempt from the provisions of said rule.
      (b) A member, when so directed by the Association, shall not expand its business during any period in which:
      (1) Any of the following conditions continue to exist, or have existed, for more than 15 consecutive business days:
      (A) A firm's net capital is less than 150 percent of its net capital minimum requirement or such greater percentage thereof as may from time to time be prescribed by the Association;
      (B) If subject to the aggregate indebtedness requirement under SEC Rule 15c3-l, a firm's aggregate indebted ness is more than 1,000 percent of its net capital;
      (C) If, in lieu of subparagraph (b)(l)(B) above, the specified percentage of the aggregate debit items in the Formula for Determination of Reserve Requirements for Brokers and Dealers under SEC Rule 15c3-3 (the alternative net capital requirement) is applicable, a firm's net capital is less than five percent of the aggregate debit items thereunder; or,
      (D) The deduction of capital withdrawals including maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in (A), (B) or (C) of this subparagraph (i);
      or
      (2) The Association restricts the member for any other financial or operational reason.
      (c) A member, when so directed by the Association, shall forthwith reduce its business:
      (1) To a point enabling its available capital to comply with the standards set forth in subparagraphs (b)(l)(A), (B) or (C) of this rule if any of the following conditions continue to exist, or have existed, for more than 15 consecutive business days:
      (A) A firm's net capital is less than 125 percent of its net capital minimum requirement or such greater percentage thereof as may from time to time be prescribed by the Association;
      (B) If subject to the aggregate indebtedness requirement under SEC Rule 15c3-l, a firm's aggregate indebted ness is more than 1,200 percent of its net capital;
      (C) If, in lieu of subparagraph (c)(l)(B) above, the specified percentage of the aggregate debit items in the Formula for Determination of Reserve Requirements for Brokers and Dealers, under SEC Rule 15c3-3 (the alternative net capital requirement) is applicable, a firm's net capital is less than four percent of the aggregate debit items thereunder; or,
      (D) If the deduction of capital withdrawals including maturities of subordinated debt scheduled during the next six months would result in any one of the conditions described in subparagraph (c)(l)(A), (B) or (C) of this rule;
      or
      (2) As required by the Association when it restricts a member for any other financial or operational reason.

      * * * * * * *

      EXPLANATION OF THE BOARD OF GOVERNORS

      Restrictions On A Member's Activity

      This explanation outlines and discusses some of the financial and operational deficiencies which could initiate action under the rule. Subparagraphs (b)(2) and (c)(2) of the rule recognize that there are various unstated financial and operational reasons for which the Association may impose restrictions on a member so as to prohibit its expansion or require a reduction in overall level of business. These provisions are deemed necessary in order to provide for the variety of situations and practices which do arise and, which if allowed to persist, could result in increased exposure to customers and to broker-dealers.

      In the opinion of the Board of Governors, it would be impractical and unwise to attempt to identify and list all of the situations and practices which might lead to the imposition of restrictions or the types of remedial actions the Corporation may direct be taken because they are numerous and cannot be totally identified or specified with any degree of precision. The Board believes, however, that it would be helpful to members' understanding to list some of the other bases upon which the Corporation may conclude that a member is in or approaching financial difficulty.

      Explanation

      (a) For purposes of subparagraphs (b)(2) and (c)(2) of the rule, a member may be considered to be in or approaching financial or operational difficulty in conducting its operations and therefore subject to restrictions if it is determined by the Corporation that any of the parameters specified therein are exceeded or one or more of the following conditions exist:
      (1) The member has experienced a reduction in excess net capital of 25 percent in the preceding two months or 30 percent or more in the three-month period immediately preceding such computation;
      (2) The member has experienced a substantial change in the manner in which it processes its business which, in the view of the Corporation, increases the potential risk of loss to customers and members;
      (3) The member's books and records are not maintained in accordance with the provisions of SEC Rules 17a-3 and 17a-4;
      (4) The member is not in compliance, or is unable to demonstrate compliance, with applicable net capital requirements;
      (5) The member is not in compliance, or is unable to demonstrate compliance, with SEC Rule 15c3-3 (Customer Protection — Reserves and Custody of Securities);
      (6) The member is unable to clear and settle transactions promptly;
      (7) The member's overall business operations are in such a condition, given the nature and kind of its business that, notwithstanding the absence of any of the conditions enumerated in subparagraphs (1) through (5), a determination of financial or operational difficulty should be made; or
      (8) The member is registered as a Futures Commission Merchant and its net capital is less than seven percent of the funds required to be segregated pursuant to the Commodity Exchange Act and the regulations thereunder.
      (b) If the Corporation determines that any of the conditions specified in subparagraph (a) of this Explanation exist, it may require that the member take appropriate action by effecting one or more of the following actions until such time as the Corporation determines they are no longer required:
      (1) Promptly pay all free credit balances to customers;
      (2) Promptly effect delivery to customers of all fully paid securities in the member's possession or control;
      (3) Introduce all or a portion of its business to another member on a fully disclosed basis;
      (4) Reduce the size or modify the composition of its inventory;
      (5) Postpone the opening of new branch offices or require the closing of one or more existing branch offices;
      (6) Promptly cease making unsecured loans, advances or other similar receivables, and, as necessary, collect all such loans, advances or receivables where practicable;
      (7) Accept no new customer accounts;
      (8) Undertake an immediate audit by an independent public accountant at the member's expense;
      (9) Restrict the payment of salaries or other sums to partners, officers, directors, shareholders, or associated persons of the member;
      (10) Effect liquidating transactions only;
      (11) Accept unsolicited customer orders only;
      (12) File special financial and operating reports; or
      (13) Be subject to such other restrictions or take such other action as the Corporation deems appropriate under the circumstances in the public interest and for the protection of members.

      * * * * * * *

      AMENDMENT TO CODE OF PROCEDURE FOR HANDLING TRADE PRACTICE COMPLAINTS 1/

      Section 29: Limitation Procedures Under Article III, Section 38 of the Rules of Fair Practice

      (a) Board of Governors Surveillance Committee — The Board of Governors shall appoint a standing Committee of the Board to be known as the Board of Governors Surveillance Committee which is composed of such members as are from time to time determined by the Board.
      (b) District Surveillance Committee — As required to implement the provisions of this rule, each District Committee shall create a District Surveillance Committee composed of two current or former District Business Conduct Committee members; two members of the Board of Governors Surveillance Committee, and one former member of the Board of Governors.
      (c) Written Notification —If the District Surveillance Committee has reason to believe that a member has not complied with any of the conditions contained in subsections (b) or (c) of Section 38, it may exercise the authority conferred by Section 38 by issuing a notice directing the member to limit its business. Such notice shall contain a statement of the specific grounds on which such action is being taken, specify in reasonable detail the nature of the limitations being imposed and inform the member that he has an opportunity to be heard, if such request is made within three business days of receipt of the notice. The District Surveillance Committee shall also provide a similar notice in writing to a member of any revision or modification of restrictions or limitations previously imposed.
      (d) Hearing — If an opportunity to be heard is requested, it shall be provided by the District Surveillance Committee within five business days of the receipt of the notice. A member requesting the opportunity to be heard shall present its reasons why the notice should be withdrawn or modified and shall be entitled to be represented by counsel. A record shall be kept of the proceeding before the District Surveillance Committee.
      (e)
      (1) Decision and Effective Date — The District Surveillance Committee shall within five business days of a hearing issue a written decision approving or modifying the limitations specified in the notice. The decision shall also provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed.
      (2) When an opportunity to be heard is not requested, the limitations contained in the notice shall become effective three days following receipt of the notice without any written decision unless the District Surveillance Committee decides upon a later effective date or unless the matter is reviewed by the Board of Governors, subject to the provisions of subsections (f), (g), and (h) hereof, and they shall remain in effect until such time as they are removed, revised or modified by the District Surveillance Committee.
      (f) Review by Board — The written decision issued pursuant to sub section (e) shall be subject to review by the Board of Governors upon application by the member aggrieved thereby filed within five business days of the date of the decision. The decision, or the notice where no opportunity to be heard was requested before the District Surveillance Committee, shall also be subject to review by the Board of Governors on its own motion within 30 calendar days of the decision or notice. Where two members of the District Surveillance Committee disagree with the determination of the Committee, the matter will automatically be reviewed by the Board of Governors. In the case of an appeal, the member shall be given an opportunity to be heard before a subcommittee of the Board within 10 business days of the written decision. If called for review, the matter shall be heard within 30 days of such action. In any hearing before the Board, a member shall be entitled to be represented by counsel. The institution of review, whether by application or on the initiative of the Board, shall operate as a stay of the action by the District Surveillance Committee unless otherwise ordered by the Board.
      (g) Composition of Board of Governors Hearing Subcommittee — The Board of Governors' hearing subcommittee shall be composed of two members of the Board of Governors' Surveillance Committee and one current member of the Board.
      (h) Decision — Upon consideration of the record, the Board of Governors shall in writing affirm, modify, reverse or dismiss the decision of the District Surveillance Committee or remand the matter for further proceedings consistent with its instructions. The Board shall set forth specific grounds upon which its determination is based and shall provide for an appropriate sanction to be immediately imposed for failure to comply with any limitations imposed. If a hearing is held, a decision shall issue within five business days of the hearing and the decision shall be the final action of the Board. If no hearing is requested, the matter shall be considered on the record and a decision shall be issued promptly. Any limitation imposed as a result of Board action shall become effective immediately upon issuance of its decision and shall remain in effect until such time as removed or modified by the District Surveillance Committee.
      (i) Application to Commission for Review — In any case where a member feels aggrieved by any action taken or approved by the Board of Governors, such member may make application for review to the Securities and Exchange Commission in accordance with Section 19 of the Securities Exchange Act of 1934, as amended. There shall be no stay of the Board's action upon appeal to the Commission unless the Commission determines otherwise.
      (j) Successive Notes — If it appears at any time to the District Surveillance Committee that, notwithstanding an effective notice or decision under subsections (c), (e) and (h) hereof, the member is still approaching financial or operational difficulty, the District Surveillance Committee may prescribe additional limitations of a member's business in which case all of the procedures specified above shall be followed prior to the implementation thereof.
      (k) Complaint by District Committee — Action by the Corporation under this Article is not intended to foreclose complaint action by the District Business Conduct Committee under the Code of Procedure for Handling Trade Practice Complaints where a violation of the Rules of Fair Practice may be involved.

      1/ Sec. Exch. Act Rel. No. 20673 (Feb. 17, 1984); 49 Fed. Reg. 7170 (Feb. 27, 1984).

      2/ Sec. Exch. Act ReL No. 18737 (May 13, 1982).

      3/ It is expected that these amendments will also be incorporated into the new procedure code which is awaiting Commission approval. See SEC File No. SR-NASD-82-11.

      1/ All language is new.


    • 84-20 National Market System Grows to 881 Securities With 50 Additions on April 17

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, April 17, the National Market System will include 881 securities as 50 more NASDAQ securities are phased into the System. These 50 securities meet the SEC's voluntary designation criteria, which include six-month average trading volume of 100,000 shares a month and a minimum bid price of $5.

      The 50 securities scheduled to join NMS on April 17 are:

      SYMBOL

      COMPANY

      HEADQUARTERS

      ALFN

      Alfin Fragrances, Inc.

      New York, NY

      AMCC

      American Continental Corporation

      Phoenix, AZ

      ABIO

      Applied Biosystems, Inc.

      Foster City, CA

      ACIS

      Applied Communications, Inc.

      Omaha, NE

      SOLR

      Applied Solar Energy Corporation

      City of Industry, CA

      SOLRW

      Applied Solar Energy Corporation (Wts)

      City of Industry, CA

      ATLF

      Atlantic Financial Federal

      Bala Cynwd, PA

      BDSY

      Baron Data Systems

      San Leandro, CA

      BAYL

      Bayly Corp.

      Englewood, CO

      CNON

      Cannon Group, Incorporated

      Hollywood, CA

      CDTX

      Chad Therapeutics Inc.

      Woodland Hills, CA

      CHSI

      Continental Healthcare Systems Inc.

      Overland Park, KS

      DPWR

      Datapower, Inc.

      Santa Ana, CA

      ELBTF

      Elbit Computers Ltd.

      Haifa, Israel

      ELRNF

      Elron Electronic Industries, Ltd.

      Haifa, Israel

      EFAC

      Energy Factors, Incorporated

      San Diego, CA

      ETRE

      Entre Computer Centers, Inc.

      Vienna, VA

      EQUA

      Equatorial Communications Company

      Mountain View, CA

      FEGP

      Federated Group, Inc. (The)

      City of Commerce, CA

      FORF

      Fortune Financial Group, Inc.

      Clearwater, FL

      GTAC

      Green Tree Acceptance, Inc.

      Minneapolis, MN

      GULL

      GULL, Inc.

      Smithtown, NY

      HABE

      Haber, Inc.

      Towaco, NJ

      HDCO

      Hadco Corporation

      Salem, NH

      HRLY

      Herley Microwave Systems

      Lancaster, PA

      HYPX

      Hyponex Corporation

      Fort Wayne, IN

      IMNX

      Immunex Corporation

      Seattle, WA

      ITEL

      Itel Corporation

      San Francisco, CA

      JWAT

      Jamaica Water Properties, Inc.

      Lake Success, NY

      MAJR

      Major Realty Corporation

      Orlando, FL

      MGRE

      Merry-Go-Round Enterprises

      Towson, MD

      MCRD

      Micro D, Inc.

      Fountain Valley, CA

      MILL

      Millicom Incorporated

      New York, NY

      NYAL

      New York Airlines, Inc.

      Flushing, NY

      NYALW

      New York Airlines, Inc. (Wts)

      Flushing, NY

      NWFN

      Northwestern Financial Corporation

      Wilkesboro, NC

      OSII

      On-Line Software International Inc.

      Fort Lee, NJ

      PCAR

      PACCAR Inc.

      Bellevue, WA

      PHRS

      Paul Harris Stores, Inc.

      Indianapolis, IN

      PCII

      Protocol Computers, Inc.

      Woodland Hills, CA

      RCOT

      Recoton Corporation

      Long Island City, NY

      RITZ

      Ritzy's (G D), Inc.

      Columbus, OH

      SBPS

      Savings Bank of Puget Sound

      Seattle, WA

      SINT

      System Integrators, Inc.

      Sacramento, CA

      USCC

      U.S. Capital Corporation

      Columbia, SC

      VANZ

      Vanzetti Systems, Inc.

      Stoughton, MA

      VTEK

      Vodavi Technology Corporation

      Scottsdale, AZ

      ZIAD

      Ziyad, Inc.

      Denville, NJ

      ZMOS

      ZyMOS Corporation

      Sunnyvale, CA

      ZTRX

      Zytrex Corporation

      Sunnyvale, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-19 MV Securities, Inc. 11 Broadway, 17th Floor New York, New York

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On March 14, 1984, the United States District Court for the Southern District of New York appointed a SIPC Trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12(h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Lee S. Richards III, Esquire
      Grais & Richards
      44 Wall Street, Suite 1100
      New York, New York 10005
      Telephone: (212) 514-9000

    • 84-18 Holiday Settlement Schedule

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      Securities markets and the NASDAQ System will be closed on Good Friday, April 20, 1984. "Regular Way" transactions made on the business days immediately preceding that day will be subject to the following schedule.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      Regulation T Date*

      April 13

      April 23

      April 25

      16

      24

      26

      17

      25

      27

      18

      26

      30

      19

      27

      May 1

      20

      Markets Closed

      23

      30

      2

      The foregoing settlement dates should be used by broker-dealers, and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions regarding the application of these settlement dates to a particular situation may be directed to the Uniform Practice Department of the NASD at (212) 839-6255.

      * * *


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-17 Amendment to Association's Rules of Fair Practice

      IMPORTANT

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members and Interested Persons

      LAST VOTING DATE IS APRIL 13, 1984

      Attached is a proposed amendment to Article V, Section 1 of the Association's Rules of Fair Practice which has been approved by the Board of Governors for submission to the membership for a vote.

      The proposed amendment to Article V, Section 1 of the Rules of Fair Practice would increase from $5,000 to $15,000 the maximum fine which may be assessed upon any member or person associated with a member. The proposed amendment is the result of a recommendation from the District Business Conduct Committees that the present $5,000 monetary limitation inhibits their ability to adequately redress violations of the Rules of Fair Practice. The present ceiling on fines of $5,000 was imposed as a result of a 1969 amendment to the Rules of Fair Practice. In the fifteen years since its adoption, however, the impact of a fine up to $5,000 has been eroded significantly by inflation.

      Please mark the ballot according to your convictions and return it in the enclosed stamped envelope to "The Corporation Trust Company." Ballots must be postmarked not later than April 13, 1984.

      The Board of Governors believes this amendment to the Rules of Fair Practice is necessary and appropriate to enable the District Business Conduct Committees and the Board of Governors to take appropriate remedial action. It is, therefore, recommended that members vote their approval.

      Sincerely,

      Gordon S. Macklin
      President

      Attachments

      ARTICLE V

      Penalties

      Penalties for Violation of the Rules

      Sec. 1. Any District Business Conduct Committee, or the Board of Governors, in the administration and enforcement of these Rules, and after compliance with the Code of Procedure, may (1) censure any member or persons associated with a member and/or (2) impose a fine not in excess of Five Thousand Dollars ($5,000.00) Fifteen Thousand Dollars ($15,000.00) upon any member or person associated with a member and/or (3) suspend the membership of any member or suspend the registration of a person associated with a member, if any, for a definite period, and/or (4) expel any member or revoke the registration of any person associated with a member, if any, and/or (5) suspend or bar a member or person associated with a member from association with all members, or (6) impose any other fitting penalty deemed appropriate under the circumstances, for each or any violation of any of these Rules by a member or person associated with a member or for any neglect or refusal to comply with any orders, directions or decisions issued by any District Business Conduct Committee or by the Board of Governors in the enforcement of these Rules, including any interpretative ruling made by the Board of Governors, as any such Committee or Board, in its discretion, may deem to be just; provided, however, that no such penalty imposed by any District Business Conduct Committee shall take effect until the period for appeal therefrom or review has expired, as provided in Section 14 of the Code of Procedure; and provided, further, that all parties to any proceeding resulting in a penalty shall be deemed to have assented to or to have acquiesced in the imposition of such penalty unless any party aggrieved thereby shall have made application to the Board of Governors for review pursuant to the Code of Procedure, within fifteen (15) days after the date of such notice.

    • 84-16 NOT AVAILABLE AT THIS TIME

      Notice to members 84-16

      NOT AVAILABLE AT THIS TIME

    • 84-15 National Market System Grows to 834 Securities With 50 Additions on March 20

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, March 20, the National Market System will include 834 securities as 50 more NASDAQ securities are phased into the System. These 50 securities meet the SEC's voluntary designation criteria, which include six-month average trading volume of 100,000 shares a month and a minimum bid price of $5.

      The 50 securities scheduled to join NMS on March 20 are:

      SYMBOL

      COMPANY

      HEADQUARTERS

      ACAL

      AirCal Inc.

      Newport Beach, CA

      ALGH

      Allegheny & Western Energy Corporation

      Charleston, WV

      ALNT

      Allnet Communications Services, Inc.

      Chicago, IL

      AMPH

      American Physicians Service Group, Inc.

      Dallas, TX

      AMTR

      AmeriTrust Corporation

      Cleveland, OH

      BATM

      Baird Corporation

      Bedford, MA

      BOLT

      Bolt Technology Corporation

      Norwalk, CT

      BBRC

      Burr-Brown Corporation

      Tucson, AZ

      CRAB

      Capt. Crab's Take-Away, Inc.

      Miami, FL

      CFCC

      Carteret Savings & Loan Association, F.A.

      Newark, NJ

      CMCA

      Comeriea Incorporated

      Detroit, MI

      CCPLS

      Consolidated Capital Realty Investors

      Emeryville, CA

      DDII

      Digital Datacom, Inc.

      Laguna Niguel, CA

      FILTZ

      Filtertek Companies (The) (Paired Common)

      Hebron, IL

      FFMC

      First Financial Management Corporation

      Atlanta, GA

      FMDB

      First Maryland Bancorp

      Baltimore, MD

      FOOD

      First National Supermarkets, Inc.

      Maple Heights, OH

      FTEN

      First Tennessee National Corporation

      Memphis, TN

      FBNC

      Florida Coast Banks, Inc.

      Pompano Beach, FL

      FDLNA

      Food Lion, Inc. (Cl A)

      Salisbury, NC

      FDLNB

      Food Lion, Inc. (CL B)

      Salisbury, NC

      FTHLA

      Foothill Group, Inc. (The) (CL A)

      Los Angeles, CA

      GEMC

      Geriatric & Medical Centers, Inc.

      Philadelphia, PA

      GLEN

      Glendale Federal Savings & Loan Association

      Glendale, CA

      GILD

      Guilford Industries, Inc.

      Guilford, ME

      STUH

      Hall (Stuart) Company, Inc.

      Kansas City, MO

      HMAZ

      Home Federal Savings and Loan Association

      Tucson, AZ

      LADF

      Ladd Furniture, Inc.

      High Point, NC

      LANE

      Lane Company, Incorporated (The)

      AltaVista, VA

      LIBN

      Liberty National Corporation

      Oklahoma City, OK

      LFTM

      Lifetime Communities, Inc.

      Jacksonville, FL

      MINVS

      MIW Investors of Washington

      Washington, DC

      MMPI

      Marquest Medical Products, Inc.

      Englewood, CO

      MOLX

      Molex Incorporated

      Lisle, IL

      PKOH

      Park-Ohio Industries, Inc.

      Cleveland, OH

      PNTA

      Pentair, Inc.

      St. Paul, MN

      POWL

      Powell Industries, Inc.

      Houston, TX

      RDKN

      Redken Laboratories, Inc.

      Canoga Park, CA

      SLON

      Sloan Technology Corporation

      Santa Barbara, CA

      SMLI

      Space Microwave Laboratories, Inc.

      Santa Rosa, CA

      SUMH

      Summit Health Ltd.

      Studio City, CA

      SNRSA

      Sunrise Savings & Loan Association of Florida

      Lake Worth, FL

      TBCC

      TBC Corporation

      Memphis, TN

      UTRK

      U.S. Truck Lines, Inc. of Delaware

      Cleveland, OH

      UOIL

      Unioil

      Glendale, CA

      UNFF

      United First Federal Savings & Loan Association

      Sarasota, FL

      VSEC

      VSE Corporation

      Alexandria, VA

      VFOX

      Vicon Fiber Optics Corp.

      Pelham Manor, NY

      WMOR

      Westmoreland Coal Company

      Philadelphia, PA

      WISE

      Wiser Oil Company (The)

      Sisterville, WV

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-14 Southeast Securities of Florida, Inc. Five Marineview Plaza, Suite 106 Hoboken, New Jersey 07030

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On February 13, 1984, the United States District Court for the District of New Jersey appointed a SIPC Trustee for the above captioned firm. Previously, a temporary receiver had been appointed for the firm on January 31, 1984.

      Members may use the "immediate close-out" procedures as provided in Section 59(1) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12(h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      David J. Sheehan, Esquire
      Crummy, Del Deo, Dolan & Purcell
      Gateway 1
      Newark, New Jersey 07102
      Telephone: (201) 622-2235

    • 84-13 PLATO Learning Center Shutdown March 3–11; Extensions of Qualification Examination Expiration Dates

      TO: All NASD Members

      Attention: Registration and Trading Departments

      Control Data Corporation will be shutting down its PLATO computer system from Saturday, March 3rd, to Sunday, March 11th, to effect major hardware consolidations. To minimize scheduling problems during the period surrounding he shutdown, the NASD is extending the PLATO expiration dates of candidate enrollments expiring the week prior to, the week of and the two weeks after the shutdown. A conversion schedule of the old and new expiration dates is published below. Accordingly, we urge candidates with expiration dates during this period to make Learning Center appointments as soon as possible in keeping with the conversion schedule.

      Old Expiration Date

      Extended Expiration Date

      February 27 through March 5

      March 26

      March 6 through March 12

      April 2

      March 13 through March 19

      April 9

      March 20 through March 25

      April 16

      Questions regarding these extended dates may be directed to CRD Communications at(202) 728-8800.

      * * * *

    • 84-12 Quarterly Checklist of Notices to Members

      TO: All NASD Members and Other Interested Persons

      Following is a list of NASD Notices to Members issued during the second quarter of 1983. Requests for copies of any notice should be accompanied by a self-addressed label and may be directed to: NASD Administrative Services, 1735 K Street, N.W., Washington, D.C. 20006.

      Notice Number

      Date

      Topic

      83-52

      October 6, 1983

      Group Surety Bond Buying Program

      83-53

      October 18, 1983

      Quarterly Checklist of Notices to Members

      83-54

      October 18, 1983

      16 Securities Mandated to Join NMS on November 8, 1983

      83-55

      October 20, 1983

      Amendments to Association By-Laws

      83-56

      October 25, 1983

      Fidelity Bonds - Definition of "Employee"; Expiration of Grace Period

      83-57

      October 26, 1983

      Trade Date - Settlement Date Schedule for Election Day and Veterans Day

      83-58

      October 27, 1983

      SEC Rule Change Relating to Foreign Securities in NASDAQ

      83-59

      October 27, 1983

      Pilot Ends - Expansion of ITS/CAES Linkage - Open to All Rule 19c-3 Securities - AT&T Divestiture

      83-60

      November 4, 1983

      National Market System to Expand to 635 Issues November 22

      83-61

      November 4, 1983

      Holiday Schedule for Remainder of 1983

      83-62

      November 18, 1983

      American Telephone and Telegraph Company (AT&T) Divestiture (sent only to firms that conduct a general securities or municipal securities business for which the NASD is the designated examining authority pursuant to SEC Rule 17d-1)

      83-63

      November 22, 1983

      1984 Schedule of Holidays

      83-64

      November 22, 1983

      Implementation of the Revised Direct Participation Programs Principal Examination (Series 39)

      83-65

      November 22, 1983

      Due Diligence and Certification Requirements with Respect to Taxpayer Identification Numbers and Backup Withholding

      83-66

      November 30, 1983

      51 Securities to Voluntarily Join NMS on Tuesday, December 20

      83-67

      December 8, 1983

      Proposed Amendments to the Corporate Financing Rule; Proposed Amendments to Section 26 of the Rules of Fair Practice

      83-68

      December 12, 1983

      Amendments to the Free-Riding and Withholding Interpretation

      83-69

      December 16, 1983

      Amendments to the Uniform Practice Code to Extend Applicability of the Code to Secondary Market Transactions in Unit Investment Trust Securities

      83-70

      December 16, 1983

      Automatic Money Market Fund Redemptions

      83-71

      December 20, 1983

      SIPC Trustee Appointed for Hanover Square Securities Group Inc., New York, N. Y.

      83-72

      December 20, 1983

      Request for Comments on Proposed Amendment to Schedule C to the By-Laws

      83-73

      December 28, 1983

      SEC Adopts Rule 15c-2 Governing Binding Arbitration Clauses in Customer Agreements

      83-74

      December 30, 1983

      Mail Vote - Proposed Amendments to Article III, Section 19 of the Rules of Fair Practice, "Customers' Securities or Funds"

      * * *

    • 84-11 Gattini & Co. 74 Trinity Place New York, New York

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On February 1, 1984, the United States District Court for the Southern District of New York appointed a SIPC trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(1) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      William J. Rochelle, III
      Skadden, Arps, Slate, Meagher & Flom
      919 Third Avenue
      New York, New York 10022
      Telephone: (212) 371-6000

    • 84-10 Holiday Settlement Schedule — February, 1984

      TO: All NASD Members and Municipal Securities Bank Dealers

      ATTN: All Operations Personnel

      The schedule of trade dates/settlement dates below reflects the observance by the financial community of Lincoln's Birthday, Monday, February 13, and Washington's Birthday, Monday, February 20. On Monday, February 13, the NASDAQ System and the exchange markets will be open for trading. However, it will not be a settlement date since many of the nation's banking institutions will be closed in observance of Lincoln's Birthday. All securities markets will be closed on Monday, February 20, in observance of Washington's Birthday.

      Trade Date-Settlement Date Schedule For "Regular-Way" Transactions

      Trade Date

      Settlement Date

      *Regulation T Date

      February 3

      February 10

      February 14

      6

      14

      15

      7

      15

      16

      8

      16

      17

      9

      17

      21

      10

      21

      22

      13

      21

      23

      14

      22

      24

      15

      23

      27

      16

      24

      28

      17

      27

      29

      20

      Markets Closed

      21

      28

      March 1

      It should be noted that February 13 is considered a business day for receiving customers' payments under Regulation T of the Federal Reserve Board.

      Transactions made on Monday, February 13 will be combined with transactions made on the previous business day, February 10, for settlement on February 21. Securities will not be quoted ex-dividend and settlements, marks to the market, reclamations, buy-ins and sell-outs, as provided in the Uniform Practice Code, will not be made and/or exercised on February 13.

      The above settlement dates should be used by broker-dealers and municipal securities dealers for purposes of clearing and settling transactions pursuant to the Association's Uniform Practice Code and Municipal Securities Rulemaking Board Rule G-12 on Uniform Practice.

      Questions concerning this notice should be directed to the Uniform Practice Department at (212) 839-6256.

      * * *


      * Pursuant to Section 4(c)(2) of Regulation T of the Federal Reserve Board, a broker-dealer must promptly cancel or otherwise liquidate a customer purchase transaction in a cash account if full payment is not received within seven (7) business days of the date of purchase or, pursuant to Section 4(c)(6), make application to extend the time period specified. The date by which members must take such action is shown in the column entitled "Regulation T Date."


    • 84-9 California Municipal Investors, Inc. 6380 Wilshire Boulevard, Ste. 1600 Los Angeles, California 90048

      TO: ALL NASD MEMBERS

      ATTN: Operations Officer, Cashier,, Fail-Control Department

      On January 31, 1984, the United States District Court for the Central District of California appointed a SIPC trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close-out open OTC contracts. Also, MSRB Rule G-12 (h)(iv) provides that members may use the above procedures to close-out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Theodore B. Stolman, Esquire
      Stutman, Treister & Glatt
      3701 Wilshire Boulevard
      Los Angeles, California 90010
      Telephone: (213) 659-2700

    • 84-8 Southeast Securities of Florida Five Marineview Plaza, Suite 106 Hoboken, New Jersey 07030

      TO: ALL NASD MEMBERS

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On January 31, 1984, the United States District Court for the District of New Jersey appointed a Temporary Receiver for the above captioned firm.

      Court order permits firm to settle open contracts with other broker-dealers. All inquiries regarding the firm should be directed to the Temporary Receiver, as noted below:

      Temporary Receiver

      David J. Sheehan, Esquire
      Crummy, Del Deo, Dolan & Purcell
      Gateway 1
      Newark, New Jersey 07102
      Telephone: (201) 622-2235

    • 84-7 SEC Staff Interpretations of Rule 15c2-4

      I M P O R T A N T

      OFFICERS, PARTNERS AND PROPRIETORS

      TO: All NASD Members and Other Interested Persons

      SUMMARY

      In response to a request by the Association, the staff of the SEC's Division of Market Regulation has recently issued its views on frequently raised interpretive questions regarding Rules 15c2-4 (the "Rule") under the Securities Exchange Act of 1934 (the "Act"). The SEC staff's views are set forth in a question and answer format and are presented to assist Association members who are involved in best efforts, "ail or none" or other contingency underwritings.

      The Rule applies to best efforts distributions of securities. The Rule prescribes procedures for such distributions conducted on an "all-or-none" basis, or on any other basis on which payment will not be made to the issuer until some further event or contingency occurs (e.g., a "minimum-maximum" offering). It requires a broker-dealer participant either to promptly deposit investors' funds received into a separate bank account, as agent or trustee for those investors, or to promptly transmit such funds to a bank escrow agent, pending the occurrence of the contingency. The purpose of the Rule is to insulate offering proceeds from unlawful activities by, or the financial reverses of, the broker-dealer participating in the offering and thus to ensure that the issuer will receive the full proceeds promptly if the contingency occurs or that investors will receive a prompt reimbursement of all of their funds if the contingency does not occur. Under the Rule, a broker's obligation with regard to funds received depends on whether it is a "$5,000 broker-dealer" or a "$25,000 broker-dealer" under the SEC's net capital rules. Upon receipt of an investor's funds, a "$25,000 broker-dealer" has two options:

      (1) To act as agent or trustee for a separate bank account until the contingency occurs; or
      (2) To transmit the monies to an unaffiliated bank to hold in escrow for the investors until the contingency occurs.

      Pursuant to Rule 15e3-1(a)(2) under the Act, a "$5,300 broker-dealer" may only receive and promptly transmit investors' checks which are payable to an unaffiliated bank escrow agent.

      QUESTIONS AND ANSWERS

      The SEC staff has prepared the following answers to a list of questions raised by the NASD concerning Rule 15c2-4.

      (1)
      Question: Where a customer's check is payable to the issuer or the bank escrow agent, but is physically received by the broker-dealer, is money "received" within the meaning of the Rule?
      Answer: Yes, this situation is governed by the provisions of the Rule. A check constitutes "money" under the Rule, and in the above situation money has. been "received" for the purposes of the Rule. 1/ A "$5,000 broker-dealer" may only physically receive and promptly transmit checks payable to an unaffiliated bank escrow agent.
      (2)
      Question: Where a customer's check is payable to the issuer (or an affiliate of the issuer) but a broker-dealer does not physically receive the check, is money "received" within the meaning of the Rule?
      Answer: Direct receipt of an investor's funds by an issuer (or an affiliate of the issuer) is not a circumstance addressed by the Rule. 2/ Although a narrow construction of the Rule's provisions might arguably lead to the conclusion that direct receipt by the issuer does not violate the Rule, direct receipt by the issuer could result in difficulties with respect to the maintenance of required books and records by the broker-dealer. In addition, if funds are sent directly to the issuer, and the issuer converts the funds or goes bankrupt, the broker may expose itself to Liability. The Corn mission's staff, therefore, believes that the better practice is to have investors' funds sent directly to the broker-dealer. 3/
      (3)
      Question: Is the Rule complied with if an investor's check is made payable to the broker-dealer with the understanding that it will be held or not deposited in a separate bank account or transmitted into escrow until some later date (such as until shortly before the termination of the offering)?
      Answer: Under the Rule, such a delay is inappropriate. The monies must be deposited or transmitted "promptly" (as defined in Answer 6). The broker-dealer may not delay depositing or transmitting checks.
      (4)
      Question: In a contingent offering of limited partnership interests, is money "received" within the meaning of the Rule under the following arrangement?
      A broker-dealer receives an investor's cheek accompanied by a signed subscription, which it forwards to the general partner for acceptance. Pending acceptance, the broker-dealer is authorized by the investor to invest his funds in a money market fund registered under the Investment Company Act of 1940. Upon acceptance of the subscription by the general partner, the broker-dealer, pursuant to a revocable letter of authorization, will sell a number of shares of the money market fund equal in value to the subscription price and forward the proceeds to the general partner.
      Answer: In this situation, because the customer's cheek is accompanied by a signed subscription agreement, money is "received" within the meaning of the Hula and the broker-dealer must "promptly deposit" it in a separate bank account or "promptly transmit" it to a bank to be held in escrow. The broker-dealer is not permitted to temporarily invest the funds in a money market fund.
      (5)
      Question: Is the Rule complied with if an investor writes a check payable to a "$25,000 broker-dealer" who, in turn, promptly writes its own check or wires funds to a separate bank account or escrow account?
      Answer: Yes, this complies with Rule 15c2-4. However, Rule 10b-9 would also have to be considered. 4/ In "all-or-none" or minimum-maximum" offerings, investors' funds may not be forwarded to the issuer until the required minimum number of securities has been sold and fully paid for in customer funds that have cleared the banking system. A broker-dealer may not substitute its own good check for the check of a customer that has insufficient funds in order to satisfy the contingency. See SEC No-Action Letter issued to Brodis Securities Incorporated (November 14, 1983).
      (6)
      Question: What do the terms "promptly deposited in a separate bank account" and "promptly transmitted" mean under the Rule?
      Answer: Absent unusual circumstances, funds should be deposited or transmitted as soon as practicable after receipt. In contingent offerings not requiring suitability determinations by the issuer or the general partner, funds should be deposited or transmitted by noon of the next business day. In contingent offerings requiring suitability determinations by the issuer or general partner (for example, most direct participation programs) where investors' checks are made payable solely to the bank escrow agent but delivered to the broker-dealer, prompt transmittal may be accomplished by forwarding the checks to the escrow agent either by noon of the next business day or by noon of the second business day after receipt of the subscription by the issuer or general partner. If the Latter option is used, the subscription must be forwarded to the issuer or general partner by noon of the next business day after receipt of the funds. See SEC Interpretive Letter issued to Lowell H. Listrom & Company, Inc. (April 27, 1983).
      (7)
      Question: How is compliance with the Rule affected where the issuer (or general partner of the issuer) and a broker-dealer participating in the distribution are affiliated?
      Answer: Where an investor sends his check directly to an issuer that is affiliated with a participating broker-dealer, "receipt" of the funds is considered to be made by the broker-dealer when the issuer receives the check. Therefore, the Rule applies and the broker-dealer is responsible for ensuring that the issuer promptly transmits the funds to an independent escrow account.
      Since the Rule imposes an obligation on a broker-dealer to ensure that funds received by it are not dissipated in any fashion and not disbursed to the issuer unless the contingency has been fully satisfied, where an issuer and a broker-dealer are affiliated, the broker-dealer should not act as agent or trustee for the funds. See Securities Exchange Act Release No. 11532 (July 11, 1975). Instead, an escrow agent should be used that is a bank unaffiliated with both the issuer (or the general partner of the issuer) and the broker-dealer.
      (8)
      Question: In an offering of securities (such as limited partnership interests) where an "all-or-none" or "minimum-maximum" is involved, how does a requirement that the issuer or general partner personally approve each prospective investor or limited partner for suitability affect compliance with either Rule 15c2-4 or Rule l0b-9?
      Answer: In an "all-or-none" or "minimum-maximum" offering, Rule 10b-9 must be considered if the issuer or general partner is required to approve the investor for suitability or otherwise. The specified minimum or total will be not be considered "sold" in bona fide transactions until such minimum or total has been accepted for subscription by the issuer or general partner.
      (9)
      Question: Does the Rule apply to private placements done on a best efforts basis in light of the use of the term "distribution" in the Rule?
      Answer: Yes, the Rule does apply to such private placements. This issue was addressed by the SEC in a recent decision. See Baikie & Alcantara, Inc., Securities Exchange Act Release No. 19410 (January 6, 1983). To the extent a private placement meets the definition of a distribution under Rule lQb-6, a private placement would be a distribution under Rule l0b-6(c)(5) under the Act, which defines the term "distribution."
      (10)
      Question: May some person other than a bank (e.g., an attorney for the broker-dealer) act as an escrow agent within the meaning of the Rule?
      Answer: No, the escrow agent must be a bank that is unaffiliated with either the issuer or the broker-dealer.
      (11)
      Questions: May the lawyer for the broker-dealer be the "agent or trustee" for the separate bank account established pursuant to paragraph (b)U) of the Rule?
      Answer: No, the lawyer of the broker-dealer or some other person could not act as agent or trustee of the separate bank account. The phrase "as agent or trustee" in the Rule refers to the broker-dealer. Among other things, this affords the SEC and the NASD clear examination authority of the separate bank account. Also, only a "$25,000 broker-dealer" may be the agent or trustee of the separate bank account.
      (12)
      Question: If & "$25,000 broker-dealer" establishes an escrow account or separate bank account to hold customer funds received in connection with an "all-or-none" or other contingency-type offering in accordance with Rule 15c2-4(b)(l) or (2), must the broker-dealer include the customer funds so held as "Item I" credits for purposes of computing the reserve formula requirements under Exhibit A to Rule 15c3-3 under the Act?
      Answer: No.
      (13)
      Question: What are the permissible investments that may be made by an agent, trustee or bank escrow agent under Rule 15C2-4?
      Answer: Rule 15c2-4(b)(l) and (2) specify that funds must be deposited in, or transmitted to, a bank by such persons. Therefore, bank accounts, including saving accounts and bank money market accounts, are the types of investments permitted under Rule 15C2-4. 5/ The monies must be held in a bank account that enables the agent, trustee, or escrow agent to "promptly" or "directly" transmit or return such funds to the person entitled thereto when the appropriate event or contingency has occurred or failed to occur. The definition of a "bank" is contained in Section 3(a)(6) of the Act and does not, for example, include a savings and loan association.6/

      In addition, with respect to offering proceeds transmitted to a bank escrow account pursuant to Rule 15c2-4(b)(2), the staff of the Division of Market Regulation will not recommend that the SEC take enforcement action under the Rule if the bank escrow agent invests offering proceeds in either short-term certificates of deposit issued by a bank, or short-term securities issued or guaranteed by the United States Government.

      Any such investment in time deposits, short term bank certificates of deposit, or short term U. S. Government-backed securities must be made in recognition of the Rule's requirement that offering proceeds held in a separate bank account or escrow be transmitted promptly to the issuer or the investor once the contingency has or has not occurred. Thus, it would be inappropriate for a bank escrow agent to invest in an otherwise permissible instrument under the Rule if that instrument's maturity date extends beyond the anticipated contingency occurence date, unless such instrument can be readily sold or otherwise disposed of for cash by the time the contingency occurs without any dissipation of the offering proceeds invested.

      The following securities are not permissible investments within the meaning of Rule 15c2-4:

      (a) money market funds;
      (b) corporate equity or debt securities;
      (c) repurchase agreements;
      (d) banker's acceptances;
      (e) commercial paper; and
      (f) municipal securities.

      * * * *

      Questions or comments with regard to the interpretations in this Notice should be addressed to William Schief, Director of Regional Attorneys, Surveillance Department at (202) 728-8229 or the SEC's Division of Market Regulation (Office of Trading Practices) at (202) 272-2848.

      Sincerely,

      John E. Pinto, Jr
      Vice President
      Surveillance


      1/ Broker-dealers are also required by Rules 17a-3 under the Act to record by memorandum any receipt of customer funds for the purchase of a security even if the customers check is payable to the issuer or bank escrow account.

      2/ Direct receipt of investors' funds by the issuer in a best efforts contingent underwriting was not anticipated or addressed by the Commission when it adopted the Rule in 1962. See Securities Exchange Act No. 6737 (February 21, 1962) and Securities Exchange Act Release No. 6689 (December 21, 1961).

      3/ However, a "$5,000 broker-dealer" may not receive customer funds unless the customer's check is payable to a bank escrow agent. See Rule 15c3-l(a)(2).

      4/ Under Rule 10b-9 a representation that an offering is on an "all or none" or "minimum-maximum" basis constitutes a manipulative or deceptive device prohibited by Section 10(b) unless prompt refunds are made to purchasers if the represented number of securities are not sold in bona fide transactions at the specified price within the specified time and if the total amount due the seller is not received by it by the specified date.

      5/ A trustee may also be restricted to certain investments by the fiduciary laws of a particular state.

      6/ But cf., Investment Company Act Release No. 13666 (December 12, 1983).


    • 84-6 Temporary Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding

      I M P O R T A N T

      Officers * Partners * Proprietors

      TO: All NASD Members and Other Interested Persons

      During the past year, the Association has taken an active role in attempting to assist members in their obligation to comply with the complex requirements imposed by both the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA") and the Interest and Dividend Tax Compliance Act of 1983 (the "Act").

      Among other things, the Association published three separate Notice to Members dealing with the new legislation. The latest notice, dated November 1983 (Notice to Members 83-65), contained temporary regulations under the Interest and Dividend Tax Compliance Act of 1983 along with explanations of the key provisions of the Act with respect to due diligence and certification procedures for Taxpayer Identification Numbers ("TIN") and new requirements with respect to backup withholding.

      Shortly after the Association's notice, the IRS published additional temporary regulations under the Act which provided further guidelines concerning the application of these requirements to broker-dealers and other payors. These additional regulations were contained in the November 25 and December 20, 1983, and the January 3, 1984, editions of the Federal Register. What follows are the key provisions of these temporary regulations presented in a question and answer format.

      These questions reflect those areas having the most significant impact on members and represent, for the most part, the most frequently asked questions concerning backup withholding.

      26 CFR Part 35 a. 9999-2, November 25, 1983

      QUESTION

      APPLICABLE PROVISIONS

      • Is backup withholding applicable to gross proceeds which are subject to information reporting by broker-dealers?

      A-12 - Yes: Member must withhold on gross proceeds, as defined in the information reporting regulations if:
      (1) TIN is missing
      (2) TIN is incorrect
      (3)* TIN is not certified under penalty of perjury ("Post 1983" accounts only)

      • Is backup withholding applicable to original issue discount?

      A-15 - Yes: OID is treated as a reportable payment of interest and as such is subject to backup withholding.

      • What is the time period required to process a TIN after receipt by a customer?

      A-17 - Regulations require processing in 30 days. However, members may treat a TIN as having been received at any time within 30 days after it is provided.

      • Are there exceptions to backup withholding during the period when a customer has applied for and is awaiting receipt of a TIN?

      A-18 - Yes: There is a 60-day grace period if the member is provided with an "Awaiting TIN Certification" as provided in the regulations. Form W-9 may be used for this purpose. The customer must also certify under penalty of perjury that he is not subject to backup withholding due to notified payee underreporting.
      A special rule for "pre-1984" accounts requires no action until January 16, 1984. After that date, withholding must occur unless: (1) the broker receives a TIN from the customer or (2) the customer provides an "Awaiting TIN Certification." If a W-9 is used, members should write "applied for" in the space reserved for the TIN. This form would be valid for the 60-day exception.
      Also, for "post-1983" accounts, members who acquire securities for customers and do not hold the security in street name need only advise the payor of the fact that the customer has failed to provide a certified TIN (as required by Section A-39 of regulations published October 4, 1983; see Notice to Members 83-65), regardless of whether an "Awaiting TIN Certification" is received.

      • Are "Exempt Recipients" also exempt from backup withholding?

      A-21 - Yes: Exempt recipients as defined in the original withholding regulations are exempt from backup withholding. Form W-9 includes a listing of such exempt payees.

      • Is the IRS developing an exemption form for foreign persons?

      A-22 - Yes: Form W-8 relating to exemptions for foreign persons will be issued by IRS. However, payors may use substitute forms if W-8 is not available.

      26 CFR Part 35 a. 9999-3 - December 20, 1983

      QUESTION

      APPLICABLE PROVISIONS

      • What are the consequences should a member fail to withhold on reportable payments when required?

      A-2 - A member is subject to the same requirements and penalties as an employer making a payment of wages, i.e., he is liable for the tax whether or not he has withheld. Additionally, he is subject to certain civil or criminal penalties.

      • Does backup withholding apply to tax-exempt interest?

      A-21 - Tax-exempt interest is generally exempt from backup withholding. However, gross proceeds of a sale or redemption of a tax exempt bond is a reportable transaction and such proceeds would be subject to backup withholding.

      • Does backup withholding apply to redemption of mutual fund shares?

      A-22 - Yes: The "gross proceeds" of fund shares redeemed are reportable under the information reporting regulations and thus would be subject to backup withholding.

      • What are the provisions for backup withholding on short sales?

      A-25 - A member has the option of withholding on gross proceeds at the time of sale or on the gain (if any) when such short sale is closed if such gain can be determined from the member's records.

      • Are there special rules for sales of securities for a customer made over the telephone where a member does not have a certified TIN for such customer?

      A-28A - Yes: A member may execute a sale transaction without first having the required certification provided: (1) the customer furnishes a TIN before the sale, and (2) the customer does not withdraw the proceeds of the sale prior to providing such certification (or prior to application of backup withholding). The customer, at the option of the member, may be allowed 30 days after the date of sale to furnish the required certification.

      Supplementary Regulations to 26 CFR Part 35 a. 9999 - 3 - January 3, 1984

      (Transitional rule with respect to withholding on gross proceeds by broker- dealers)

      QUESTION

      APPLICABLE PROVISION

      • Has the requirement to obtain the required certification on "post 1983" accounts been waived, at the broker's option, until April 1, 1984?

      A-28B - Yes, therefore the account will not be subject to backup withholding provided a TIN is obtained by the member prior to the sale.

      • Are there any transitional rules for "pre 1984" accounts?

      A-28B - Yes: For "pre 1984" accounts, backup withholding may be waived on the gross proceeds of a sale for customers who have not furnished a TIN provided: (1) the customer furnishes a TIN to the broker within 30 days after the date of the sale, and (2) the customer does not withdraw the proceeds of the sale prior to the time his TIN is furnished to the broker (or the application of backup withholding). Proceeds may be invested in other properties during such 30-day period provided that 20% of the proceeds are held in cash in the customer's account.

      * * * *

      Because of the complex nature of these regulations and the potential liabilities which could be incurred for non-compliance, members are urged to consult with their tax counsel or accountant as to their obligations under these rules. Once again, members are reminded that requests for tax rulings or specific interpretations of these regulations should be addressed directly to the IRS.

      Please direct any questions concerning this notice to James M. Cangiano, Associate Director, Department of Policy Research, at (202) 728-8273.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services

      Attachments

      Federal register

      Department of the Treasury

      Internal Revenue Service

      DEPARTMENT OF THE TREASURY

      Internal Revenue Service

      26 CFR Part 35a

      [T.D. 7922]

      Employment Taxes; Backup Withholding and Due Diligence Relating to Taxpayer Identification Numbers and Certification Requirements

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Temporary regulations.

      SUMMARY: This document provides temporary regulations relating to backup withholding and due diligence relating to taxpayer identification numbers and certification requirements. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 363%. These regulations affect payors and payees of, and brokers with respect to, reportable payments and provide them with the guidance necessary to comply with the law.

      DATE: The temporary regulations are effective for payments made after December 31, 1983.

      FOR FURTHER INFORMATION CONTACT: Diane Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, N.W., Washington, D.C. 20224 (202-566-3829).

      SUPPLEMENTARY INFORMATION:

      Background

      On October 4, 1983, the Federal Register published temporary employment tax regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (48 FR 45362). Those amendments were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 389). Section 3406 was added to the Internal Revenue Code of 1954 by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 371), and section 6676 of the Code was amended by section 105 of the Act (Pub. L. 98-67, 97 Stat. 380).

      This document contains temporary regulations relating to the requirement to impose backup withholding on reportable payments and the exercise of due diligence by payors of reportable interest, dividends, and patronage dividends and brokers. This document adds new § 35a.9999-2 to part 35a, Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983, to Title 26 of the Code of Federal Regulations. In addition, this document amends Q-42 (relating to window transactions) of the question and answers published in the Federal Register on October 4, 1983 (48 FR 45362). Because these provisions are generally effective for payments made after December 31, 1983, there is a need for immediate guidance so that payors (iini payees can prepare to comply with these provisions.

      It is expected that further temporary regulations with a cross-reference to a notice of proposed rulemaking, containing additional rules relating to backup withholding, will be published within a month. The temporary regulations contained in this document will remain in effect until superseded by final regulations on this subject.

      These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which payors and payees of reportable payments (including reportable interest dividend, and patronage dividend payments) may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.

      Explanation of Provisions

      These regulations provide additional guidance concerning the due diligence standard and provide general rules with respect to backup withholding. Most of the regulations address operational concerns of payors who must adapt their systems to begin withholding on payments made after December 3i, 1983.

      With respect to due diligence, the regulations provide additional guidance concerning the application of the due diligence exception, the payments to which due diligence is applicable, and the form and timing of the required mailing of mailings. The regulations also specify when due diligence applies to trustees, custodians, and fiduciaries.

      The regulations provide guidance concerning the application of backup withholding to payments subject to reporting under section 6041 (relating to rents, royalties, commissions, etc.), section 604lA(a) (relating to nonemployee compensation), section 6045 (relating to brokers and barter exchanges), and section 6050A (relating to certain fishing boat operators).

      With respect to reportable interest or dividend payments, the regulations explain how withholding will apply to original issue discount and address how payors may choose not to withhold on minimal payments of interest and dividends.

      Section 3400fg)(3) requires that an exemption from withholding shall be provided for the period of time during which a payee is awaiting receipt of a taxpayer identification number. The regulations prescribe certain requirements that a payee must comply with in order to qualify for the exemption. The Service has determined that it generally takss a person approximately 4 weeks to receive a taxpayer identification number. Thus, the regulations provide that a payee generally has 60 days in which to furnish a taxpayer identification number to the payor. Backup withholding is not imposed on payments made during that period, if a payee certifies in the manner required that he or she is waiting for receipt of a taxpayer identification number.

      The regulations also provide rules related to the application of backup withholding to trusts and e-states. Finally, the regulations specify the record retention requirements for forms related to backup withholding.

      With respect to the requirement to withhold under section 3406(a)(l) (B) or (C) when notified by the Service that a payee's taxpayer identification number is not correct or that the payee is subject to withholding due to a notified payee underreporting, payors will not be required to withhold on payments made to such payee until 30 days after temporary regulations are published in the Federal Register explaining how withholding will apply under section 3406(a)(l) (B) or (C).

      Nonapplicability of Executive Order 12291

      The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.

      Regulatory Flexibility Act

      No general notice of proposed rulemaking is required by 5 U.S.C. 533(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.

      Drafting Information

      The principal author of these regulations is Diane Kroupa of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. However, personnel from other offices of the Internal Revenue Service and the Treasury Department participated in developing the regulations on matters of both substance and style.

      List of Subjects in 26 CFR Part 35a

      Employment taxes. Income taxes. Backup withholding, Interest and Dividend Tax Compliance Act of 1983.

      Adoption of Amendments to the Regulations

      Accordingly Part 35a is amended as follows:

      PART 35A—[AMENDED]

      Paragraph 1. Section 35a.9999-2 is added immediately after § 35a.9999-l to read as follows:

      § 35a.9999-2 Questions and answers concerning due diligence and issues In connection with backup withholding.

      The following questions and answers principally concern the backup withholding requirement with respect to reportable payments and the due diligence exception to the penalty on payors of reportable interest and dividend payments for failure to provide a payee's correct taxpayer identification number on certain information returns. These requirements are issued under the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369):

      Due Diligence

      Q-l. If a payor of reportable interest or dividends does not send the mailing or mailings described in A-5 and A-6 of § 35a.9999-l of the Temporary Employment Tax Regulations, issued under the Interest and Dividend Tax Compliance Act of 1983, T.D. 7916 ("§ 35a.9999-l"), to all payees who have not certified under penalties of perjury that their taxpayer identification numbers are correct, will a. payor be considered to have exercised due diligence with respect to a payee to whom the payor sends the required mailing or mailings?
      A-l. Yes. Due diligence applies on a payee-by-payee basis. For example, if a payor sends the separate mailing described in A-5 of § 35a.9999-l by December 31, 1983, only to certain payees, the payor will be considered to have exercised due diligence with respect to the payees to whom the mailing was sent. However, the payor will not be considered to have exercised due diligence with respect to those payees to whom the payor did not send the required mailing or mailings.
      A penalty for failure to provide a correct taxpayer identification number will not be imposed merely because the payor fails to send the required mailing or mailings. Rather, a penalty will be imposed only in the case of an information return filed by a payor of reportable interest or dividends if the required mailing or mailings were not sent to the payee and the payor fails to include a taxpayer identification number or includes an incorrect number on the return filed with respect to the payee.
      Q-2. Does the due diligence standard apply to reportable payments other than reportable interest or dividends?
      A-2. No. The due diligence standard does not apply to payments reportable under sections 6041, 604lA(a), 6045, or 6050A. Thus, payors of these other reportable payments are not required to send the mailings described in A-5 and A-6 of § 35a.9999-1.
      Q-3. Do the rules of section 7503 of the Internal Revenue Code, regarding the time for performance of an act where the last day to perform the act falls on Saturday, Sunday, or a legal holiday, apply to the time limits for the mailings described in A-5, A-6, A-52, A-53, and A-55 of § 35a.9999-l?
      A-3. Yes. For example, a mailing that must be sent on or before Saturday, December 31, 1983, will be considered timely if sent on or before Tuesday, January 3, 1984.
      Q-4. Are trustees, custodians, or other fiduciaries subject to the due diligence standard?
      A-4. The due diligence standard does not apply to a trustee, custodian, or other fiduciary, unless such person is a payor of reportable interest or dividends. A trustee, custodian, or other fiduciary is not a payor of reportable interest of dividends simply because the trustee, custodian, or fiduciary receives a payment of reportable interest or dividends. If a trust is considered a payor of reportable interest or dividends under A-20, below, however, the due diligence standard applies.
      Q-5. Is a payor required to send the mailings described in A-5 and A-6 of §35a.9999-l by first-class mail, if it is the practice of the payor not to send correspondence to the payee by first-class mail, but rather to deliver personally, or to use intra-office mail to communicate with-the payee?
      A-5. No. A payor may send the mailing or mailings by first-class mail, by personal delivery, or by intra-office mail, provided that the mailing or mailings are delivered by the same method used by the payor in sending account activity and balance information and other correspondence to the payee.
      Q-6. Must a payor affix postage to the return envelope to satisfy the requirement of including a postage-prepaid reply envelope in the mailings described in A-5 and A-6 of § 35a.9999-1?
      A-6. The requirement that a payor must include a postage-prepaid reply envelope will be satisfied by the use of a "postage-prepaid envelope," a "business reply mail envelope," or by affixing the required postage to a self-addressed reply envelope. (A "business reply mail envelope" involves an arrangement in which postage is charged only when a customer returns the reply envelope.)
      Q-7. Must a payor who sends the mailings described in A-5 and A-6 of § 35a.9999-l to a foreign address affix postage to the reply envelope?
      A-7. No. A payor is required to include only a self-addressed reply envelope in a mailing to a foreign address. A payor is not required to affix postage to a reply envelope included in a mailing to a foreign address," regardless of whether the payee is a United States citizen, a United States resident, or a non-resident alien.
      Q-8. Will a payor who sends the mailings described in A-5, A-6, A-52, A-53, and A-55 of § 35a.9999-l violate the separate mailing requirement if the payor sends both a form W-9 (or substitute form) and a Form W-8 (or substitute form) in the same mailing?
      A-8. No. The payor may include in any separate mailing both a solicitation of the payee's taxpayer identification number (Form W-9) and a solicitation of a certification of the payee's foreign status (Form W-8).
      Q-9. Do "window transactions," as defined in CM2 of § 35a.9999-1, include payments on Treasury bills and other instruments not in definitive form?
      A-9. No. Because Treasury bills are not in definitive form, payments upon Treasury bills are not treated as window transactions. Similarly, payments upon other instruments not in definitive form are not treated as window transactions. The special rules for window transactions set forth in A-42 of § 35a.9999-l thus apply only to redemptions of United States savings bonds, and to payments upon interest coupons, commercial paper, and banker's acceptances, if such instruments are in definitive form. The due diligence requirements set forth in A-5 and A-6 of § 35a.9999-1 are thus applicable to payors of payments on Treasury bills and other instruments not in definitive form, if those instruments are considered to have been acquired before 1984, and mature after December 31, 1983. In addition, the certification requirements set forth in A-32 of § 35a.9999-l and all other relevant backup withholding requirements apply to payments on Treasury bills and other instruments not in definitive form.

      Requirement of Backup Withholding

      Q-10. Does backup withholding apply to reportable payments other than reportable interest and dividend payments?
      A-10. Yes. Backup withholding also applies to payments that are subject to reporting under sections 6041(a) or (b).604lA(a), and 6045, and to certain payments reportable under section 6050A ("other reportable payments"). Backup withholding applies to other reportable payments, other than payments reportable under section 6045, only if: (1) The payee fails to furnish a taxpayer identification number to the payor; or (2) the Internal Revenue Service notifies the payor that the taxpayer identification number furnished by the payee is not correct. Except in the case of payments reportable under section 6045, a payee of other reportable payments is not required to make any certifications under penalties of perjury, unless the payee seeks to claim the exemption from withholding while waiting for receipt of a taxpayer identification number (as explained in A-18, below). See A-12 and A-13, below, for rules regarding the application of backup withholding to transactions subject to reporting under section 6045.
      Q-ll. Under what circumstances is a payor of payments reportable under section 6041 or section 604lA(a) required to impose backup withholding?
      A-ll. A payor is required to withhold on reportable payments under sections 6041 and 604lA(a) only if: (1) A payee is subject to backup withholding under A-10, above, [i.e., the payee fails to furnish a taxpayer identification number to the payor or the Internal Revenue Service notifies the payor that the taxpayer identification number furnished by the payee is not correct); and (2) any one of the following three conditions is satisfied: (a) Reportable payments to the payee aggregate $600 or more during the calendar year; (b) the payor was required to file an information return under section 6041 or section 6041A(a), whichever is applicable, with respect to that payee for the preceding calendar year [i.e., payments subject to reporting under section 6041 or section 6041A(a), whichever is applicable, aggregated $600 or more to the payee for the preceding calendar year); or (c) the payor was required to impose backup withholding on payments made to the payee during the preceding calendar year (and the payments subject to backup withholding were of a type reportable under section 6041 or section 6041A(a), whichever is applicable).
      If a payor pays amounts aggregating $600 or more to a payee during a calendar year (condition (a) above), the amount subject to withholding is: (1) The amount of the payment that causes the aggregate payments to the payee during the calendar year to total $600 or more (assuming that the payor made no payments during the preceding calendar year that were subject to either reporting under section 6041 or section 6041A(a), whichever is applicable, or backup withholding); and (2) the amount of any additional payments of a type subject to reporting under section 6041 or section 604lA(a), whichever is applicable, made to the payee before the payee provides a taxpayer identification number to the payor of after the Internal Revenue Service notifies the payor that the taxpayer identification number furnished by the payee is not correct. For example, if a payor made payments of $200 each on March 31, 1984, June 30, 1984, and September 30, 1984, to a payee, which were reportable undeF section 6041, the payments on March 31, and June 30 would not be subject to backup withholding, because the $600 threshold would not have been reached as a result of making either of those payments (assuming that payments made to the payee during 1983 did not aggregate $600 or more and were thus not subject to reporting). However, the payor would be required to withhold 20 percent of the $200 payment made on September 30, if the payee did not furnish a taxpayer identification number to the payor, or the Internal Revenue Service notified the payor that the number provided by the payee is incorrect, prior to the payment date (September 30). If the payor made a $50 payment of a type reportable under section 6041, on December 31, 1984, to the same payee, the payor would be required to withhold 20 percent of the $50 payment, if the payee had not provided a taxpayer identification number, or the Internal Revenue Service notified ths payor that the number provided by the payee is incorrect, prior to the date of payment (December 31).
      If, in the preceding calendar year, a payor was required to file an information return with respect to payments to the payee under section 6041 or section 604lA(a) (condition (b) above), or a payor is required to impose backup withholding with respect to payments of a type that were reportable under such sections (condition (c) above), the payor is required to withhold 20 percent of any payment of a type reportable under section 6041 or section 604lA(a) made to the payee during the following year, regardless of the amount of the payment, if, prior to the date of the payment, the payee fails to provide a taxpayer identification number to the payor, or the Internal Revenue Service notifies the payor that the number provided by the payee was not correct. Assume, for example, that a payor made reportable payments under section 6041 to a payee that aggregated $600 or more during 1983, so that the payor was required to file an information return with respect to the payments for 1983. If the payor paid $300 to the payee on January 31, 1984, and the payment was of a type reportable under section 6041, the payor would be required to withhold 20 percent of the $300 payment, if, prior to January 31, 1984, the payee did not provide a taxpayer identification number to the payor, or the Internal Revenue Service notified the payor that the number provided by the payee was not correct. Moreover, because payments during 1984 to the payee, or a type subject to reporting under section 6041, would be subject to backup withholding, the payor would be required to withhold 20 percent of any payment of a type reportable under section 6041 that was made to the payee in 1985, unless the payee provided a taxpayer identification number prior to the payment date, or corrected the number provided, if the payor was notified by the Service that the previous number was not correct.
      In making the determination of whether payments to a payee aggregate $600 or more during a calendar year or whether condition (b) or condition (c) applies to a payee, the payor must aggregate and take into account payments of the same kind made to the same payee. Payments that are reportable under section 6041 are not required to be aggregated with payments reportable under section 604lA(a). Payors may, in their discretion, aggregate: {1) Payments not of the same kind to the same payee, reportable under section 6041 and 604lA(a), and (2) payments reportable under section 6041 with payments reportable under section 6041A(a).
      Q-12. Does backup withholding apply to gross proceeds subject to reporting under section 6045?
      A-12. Yes. Backup withholding applies to gross proceeds reportable by brokers, if the customer does not furnish a taxpayer identification number to the broker in the manner required, or the Internal Revenue Service notifies the broker that the number furnished by the customer was incorrect. With respect to a post-1983 account (as defined in A-41 of § 35a.999-l), the taxpayer identification number provided by a customer must be certified under penalties of perjury. With respect to all other accounts, the customer's taxpayer identification number is not required to be certified under penalties of perjury. For example, if a customer who had no prior relationship with a broker opens an account, arranges for the broker to sell readily tradable securities for $100 during 1984, and the sale is required to be reported under section 6045, the gross proceeds of the sale are subject to backup withholding, if the customer does not provide: (1) His taxpayer identification number to the broker and certify it under penalties of perjury; or (2) an awaiting TIN certification (described in A-18, below).
      Special rules governing backup withholding with respect to commodity futures contracts, margin account transactions, and short sale transactions will be issued in the near future.
      Q-13. Does backup withholding apply to barter exchanges that are subject to reporting under section 6045?
      A-13. Yes. If the barter exchange is required to report an exchange under section 6045, it is required to impose backup withholding if a member of the barter exchange does not provide a taxpayer identification number in the manner required or the Internal Revenue Service notifies the barter exchange that the number provided by the member is incorrect. With respect to an account or ongoing relationship established between a barter exchange and a member after December 31, 1983, the member is required to provide a taxpayer identification number to the barter exchange under penalties of perjury. With respect to all other accounts, the member's number is not required to be certified under penalties of perjury.
      Q-14. What action is a payor of reportable interest or dividends required to take with respect to payments made on a readily tradable instrument held by a payee, if: (1) Additional readily tradable instruments of the same issue are purchased by the same payee, (2) it is the practice of the payor to combine in one account all the readily tradable instruments of the same issue owned by the same payee (and to make a single aggregate payment with respect to all readily tradable instruments of the same issue included in the account), and (3) certain of the readily tradable instruments of the same issue owned by the payee are subject to backup withholding and others are not subject to backup withholding?
      A-14. If it is the practice of a payor to combine in one account all readily tradable instruments of the same issue owned by a payee and if certain of those instruments are subject to backup withholding and others are not subject to backup withholding, the payor is required to withhold 20 percent of the aggregate payment made with respect to all the instruments in the account. If it is not the practice of the payor to combine in one account all readily tradable instruments of the same issue owned by a payee, the payor is required only to withhold 20 percent of the payment made on the instrument or instruments with respect to which the payee is subject to backup withholding.
      For example, assume that a payee, prior to 1984, held a readily tradable instrument and that a taxpayer identification number had been provided to the payor. Assume further, during 1984: (1) The payee acquired another readily tradable instrument of the same issue through a post-1983 brokerage relationship, (2) the broker notified the payor that the payee failed to certify that he was not subject to backup withholding due to notified payee underreporting, and (3) the payor, in accordance with its customary practice, combined in one account both readily tradable instruments of the same issue owned by the payee and made an aggregate payment with respect to both instruments in the account. In the circumstance, the payor would be required to withhold 20 percent of the aggregate payment made with respect to both of the instruments of the same issue owned by the payee.
      Q-15. Does backup withholding apply to-original issue discount?
      A-15. Yes. Original issue discount is treated as a payment of interest reportable under section 6049. Thus, original issue discount is subject to backup withholding in the same circumstances in which backup withholding applies to an actual payment of interest. In determining the timing and amount of original issue discount subject to backup withholding, rules consistent with § 31.3455(b)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall apply. Thus, the amount to be withheld is limited to the amount of cash paid.
      Q-16. If an exempt recipient files a Form W-9 (or a substitute form) in order to be exempt from backup withholding, may the payor rely on the form if the payee fails to include its taxpayer identification number on the form?
      A-16. No. A Form W-9 (or substitute form) may be relied upon by a payor only if it includes the payee's taxpayer identification number. Thus, if the Form W-9 (or substitute form) provided by the payee does not contain a taxpayer identification number, the payor must withhold 20 percent of all payments made to the payee. If, however, they payor treats the payee as an exempt recipient under A-29 of § 35a.9999-1 and § 31.3452(c)-l (b) through (p) of the Employment Taxes and Collection of Income Tax at Source Regulations without requiring the payee to file a Form W-9 (or substitute form), the payor is not required to withhold, even though the payee has not furnished a taxpayer identification number to the payor. This exception, however, is not available to barter exchanges subject to reporting under section 6045.
      Q-17. In determining whether a payee failed to provide a taxpayer identification number to a payor, within what period of time must a payor treat a taxpayer identification number or an "awaiting TIN certification" (as defined in A-18, below) provided by a payee as having been received?
      A-17. As provided in A-31 of §35a.9999-l, a payor is required to process a taxpayer identification number within 30 days after the payor receives the taxpayer identification number from the payee. Thus, for example, if a payor of a payment reportable under section 6041 or section 6041A(a) receives a taxpayer identification number on January 16, 1984, the payor must process the number on or before February 15, 1984. As a result, the payor should commence backup withholding with respect to payments made to the payee after January 16, 1984, if the payee were subject to backup withholding under A-10 and A-ll, above, but the payor must cease backup withholding by February 15, 1984. The payor may, however, treat the taxpayer identification number as having been received at any time within 30 days after it is provided, so that backup withholding in the example outlined above would not have to be imposed on any payment if the payor processed the number prior to making the payment.
      A payor also has 30 days after delivery by a payee of an awaiting TIN certification (as defined in A-18, below) to treat the certificate as having been received.

      Exceptions To Backup Withholding

      Q-18. Is a payor required to impose backup withholding during a period when a payee is waiting for receipt of a taxpayer identification number?
      A-18. In general, if a payee does not provide a taxpayer identification number to a payor, the payor must withhold 20 percent of all payments made to the payee on or after January 1, 1984. However, the payee will not be subject to backup withholding for a period of 60 days, if the payee is waiting for receipt of a taxpayer identification number. In order to be entitled to the 60 day exemption, the payee must comply with the requirements of this A-18.
      A payee shall be treated as if he provided a certified taxpayer identification number for a period of 60 days following the day the payor receives a certificate signed under penalties of perjury (an "awaiting TIN certification"). (See A-17, above, for rules related to the day on which an awaiting TIN certification may be treated as having been received.) If the payor does not receive a taxpayer identification number within 60 days after the payee delivers the awaiting TIN certification to the payor, the payor must withhold 20 percent of all payments made to the payee, until the payee provides a taxpayer identification number to the payor. The awaiting TIN certification must contain statements: (1) That the payee has not been issued a taxpayer identification number, (2) that the payee has applied for a number or intends to apply for a number in the near future, and (3) that the payee understands that if the payee does not provide a taxpayer identification number to the payor within 60 days, the payor is required to withhold 20 percent of any payments made thereafter to the payee until a number is provided. Language that is substantially similar to the following will satisfy this requirement:
      I certify, under penalties of perjury, that a taxpayer identification number has not been issued to me, and that I mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office (or I intend to mail or deliver an application in the near future). I understand that if I do not provide a taxpayer identification number to the payor within 60 days, the payor is required to withhold 20 percent of all reportabie payments thereafter made to me until I provide a number.
      The foregoing certification, at the discretion of the payor, may be included on the same form as the certifications required by A-32 of § 35a.9999-l.
      The payor may use Form W-9, as currently issued by the Internal Revenue Service, to satisfy the requirements of this A-18. If the Form W-9 is used, the payee should write "Applied For" in the space reserved for the taxpayer identification number. The payor also should inform the payee, in supplemental instructions or orally, "that if a taxpayer identification number is not received by the payor within 60 days, the payor is required to withhold 20 percent of all reportabie payments thereafter made to the payee until the payor receives a number from the payee." Future editions of the Form W-9 will contain the supplemental instruction.
      A payee who seeks to qualify for the 60 day exemption from backup withholding also must certify, under penalties of perjury, that the payee is not subject to backup withholding due to notified payee underreporting, when required to do so by A-32 of § 35a.9999-1 or A-12 or A-13, above. Thus, a payee who establishes an account or acquires an instrument after December 31, 1983, will be subject to backup withholding irrespective of whether the payee certifies that the payee is waiting for receipt of a taxpayer identification number, if the payee fails to make the certification described in A-32 of § 35a.9999-l or A-12 or A-13, above, concerning notified payee underreporting.
      When a payee who opens an account or acquires an instrument after December 31, 1983, and who qualifies for this 60 day exemption furnishes a taxpayer identification number to the payor, the payee is required to certify under penalties of perjury, in accordance with A-32 of § 35a.9999-l or A-12 or A-13, above, that the taxpayer identification number provided is correct. If no such certification is provided, the payor must institute backup withholding.
      A special rule is provided for accounts that are established, or instruments that are acquired (in the case of reportabie interest or dividend payments) or relationships established (in the case of other reportabie payments) before January 1, 1984. All payees of such accounts, instruments, or relationships will be treated as if they are waiting for receipt of a taxpayer identification number, without any action on their part, until January 16, 1984. The payor must withhold 20 percent of any payment made after January 16, 1984, unless: (1) The payee has certified, as required by this A-18, that the payee is waiting for receipt of a taxpayer identification number or (2) the payor receives a taxpayer identification number from the payee. If, however, a payor has been provided with a Form W-9 (or substitute form) with an "Applied For" designation, by a payee of an account, instrument, or relationship established before January 1, 1984, the form will be valid for 60 days, notwithstanding the fact that the supplemental instruction referred to above was not provided to the payee.
      Assume, for example, that the payee of an account established before January 1, 1984, delivered an awaiting TIN certification to the payor on December 30, 1983 and the payor processed the certification that day. The payor should not impose backup withholding on payments made to the payee prior to February 29, 1984, because the payee is treated under this A-18 as having provided a taxpayer identification number during that period.If the payor did not receive a number from the payee prior to February 29, the payor would be required to withhold 20 percent of any payment made to the payee on or after February 29, and before the payee provided a number. (See A-17, above, however, for the rules relating to the date on which the payor may be treated as having received the awaiting TIN certification or a taxpayer identification number.) As another example, assume that a payee of an account established before January 1, 1984, delivered an awaiting TIN certification to the payor on January 12, 1984 and processed it that day. The payor should not impose backup withholding on payments made between January 1 and January 12, because the payee would be treated during that period as if he had provided a taxpayer identification number under the rule set forth above. Moreover, backup withholding would not apply to payments made during the 60 days following January 12, because the payee on that date delivered an awaiting TIN certification. Backup withholding would begin only if the payor had not received a taxpayer identification number within that 60 day period. (See A-17, above, for the rules relating to the dates on which the payor may be treated as having received the certificate or the taxpayer identification number.)
      The 60 day exemption applicable when a payee provides an awaiting TIN certification applies to payments made on readily tractable instruments only if the instrument is acquired directly from the payor (including a broker that holds the instrument in street name), unless the payee provides an awaiting TIN certification directly to the payor. Thus, if a broker opens a new account after 1983 and acquires a readily tradable instrument for a payee who has no taxpayer identification number, and the instrument is not held in street name, the broker must advise the payor that the payee failed to provide a taxpayer identification number under penalties of perjury, regardless of whether an awaiting TIN certification is provided to the broker. The payor in such a situation, however, must include in the notice sent to a payee (as required by A-39 of § 35a.9999-l) a statement informing the payee that, if the payee does not have a taxpayer identification number, the payee will be exempt from backup withholding for a period of 60 days following the payor's receipt of an awaiting TIN certification, provided that the payee signs an awaiting TIN certification and returns it to the payor. (See A-17, above, for the rules relating to the date on which the payor may be treated as having received the certificate.) An awaiting TIN certification, in a form permitted by this A-18, should be included with the notice. The form of the notice described in A-39 of § 35a.9999-l and this A-18 is set forth in the Appendix to this temporary regulation.
      Neither the 60 day exemption nor the special presumption applicable to accounts, instruments, and relationships established before January 1, 1934 applies to window transactions, as defined a A-9, above, and Q-42 of § 35a.9999-l. Therefore, a payor is required to withhold 20 percent of any window transaction payment whenever a payee of such a payment does not provide a taxpayer identification number of the payor.
      Q-19. Are payors required to withhold on payments that are less than $10, or that, if determined on an annualized basis, would be less than $10 (a "minimal payment")?
      A-19. A payor of reportable interest or dividends has the option not to withhold on minimal payments, or, alternatively, to withhold on payments of any amount. The principles of § 31.3452(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall be utilized in determining whether a reportable interest or dividend payment may be treated as a minimal payment with respect to which backup withholding is not required.
      The annualization requirement of § 31.3452(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall not apply to window transaction payments. A payor may choose not to withhold on any window transaction payment that is less than $10. However, all window transaction payments made at the same time must be aggregated.
      The $10 minimal payment exception does not apply to other reportable payments [i.e., payments other than reportable interest or dividends), except payments reportable under section 6045. Payments reportable under section 6045, like reportable interest and dividends, are subject to backup withholding, at the payor's option, only if the reportable amount exceeds $10.The annualization rule of § 31.3452(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations is inapplicable to payments reportable under section 6045.
      Q-20. Are beneficiaries of trusts or estates subject to backup withholding on distributions from the trust or estate?
      A-20. A beneficiary of a trust or estate is subject to backup withholding only if the trust or estate is a payor of a reportable payment. If a trust or estate receives a payment of interest. dividends or any other reportable amount, and if the trust or estate is not a grantor trust (and thus reports receipt of the reportable amount on a Form 1041 (see § 1.671-4 of the Income Tax Regulations)), distributions by the trust or estate to the beneficiaries will not be considered to be a payment of interest, dividends or other reportable amounts.
      Special rules are provided, however, with respect to trusts when a grantor is considered the owner of all or a portion of the trust (and there are included in . computing the grantor's tax liability those items of income attributable to that portion of the trust) (a "grantor trust"). The special rules applicable to such trusts do not affect payors of payments made to a grantor trust. Rather, the payments to the trust are subject to the general rules of backup withholding. Payments between a grantor trust and its grantors, however, are subject to the special rules, which differ depending on the number of grantors.
      If a trust has ten or fewer grantors, payments of interest, dividends or other reportable amounts (except gross proceeds reportable under section 6045) made to the trust are considered payments of the same kind made by the trust (as payor) to each grantor (as payee), in proportion to each grantor's ownership ot the trust. Each grantor of such a trust is treated as having received his or her proportionate share of the reportable payment on the day the payment is received by the trust. Accordingly, any reportable payments made to the trust are treated as reportable payments made by the trust to the grantor or grantors and are subject to all applicable backup withholding requirements. If, for example, a grantor of a trust having 10 or fewer grantors had not provided a taxpayer identification number to the trust in the manner required, the trustee would be required to withhold and remit 20 percent of the reportable payment. In addition, the trustee of a grantor trust having ten or fewer grantors, established on or after January 1, 1984, may not certify either that the trust is not subject to backup withholding due to notified payee underreporting or that the taxpayer identification number provided is correct, unless each grantor has furnished the trustee with such a certification signed under penalties of perjury.
      If a grantor trust has more than ten grantors, the trustee is required to treat payments of interest, dividends or other reportable payments (except gross proceeds reportable under section 6045) made to the trust as payments of the same kind made by the trust to each grantor, in an amount equal to the distribution made by the trust to each grantor, on the date on which the distribution to the grantor is paid or credited. The trust is thus treated as a payor of the same types of payments received by the trust, for the purpose of the backup withholding requirements. The trustee of such a trust is required to withhold 20 percent of amounts paid or credited to any grantor who is subject to backup withholding if: (1) The grantor fails to provide a taxpayer identification number to the trust, (2) the grantor fails to provide a certification required by A-32 of § 35a.9999-l, (3) the trust is required to impose backup withholding under the special rules applicable to readily tradable instruments (A-40 of § 35a.9999-l), or (4) the Internal Revenue Service notifies the trustee that the grantor provided an incorrect taxpayer identification number. If the reportable amount of the distribution is greater than the amount distributed, the trustee may, in its discretion subject the entire reportable amount to backup withholding.
      For example, if a grantor trust having 100 grantors received a reportable interest payment of $100,000, which was of a type reportable under section 6049, and made a cash distribution of $900 to each grantor (after deducting certain expenses), the trustee would be required to withhold 20 percent of the $900 payment made to any grantor who was subject to backup withholding. Similarly, if a grantor trust having 100 grantors received an oil royalty payment of $100,000, which was of a type reportable under section 6041, and the trust made a cash distribution of $8,000 to each grantor (after deducting certain production related taxes and expenses), the trustee would be required to withhold 20 percent of the $8,000 payment made to any payee who had not provided a taxpayer identification to the trust. Because the certifications required by A-32 of § 35a.9999-l do not apply to payments of a type reportable under section 6041, grantors of the trust would not be subject to backup withholding if they failed to make such certifications.
      In addition, the trustee of a grantor trust having more than ten grantors may certify that the trust's taxpayer identification number is correct and that the trust is not subject to backup withholding due to notified payee underreporting, without regard to the status of the individual grantors of the trust.
      Q-21. Are reportable payments made to exempt recipients subject to backup withholding?
      A-21. Answer 29 (A-29) of § 35a.9999-1 provides that a payor of reportable. interest of dividends is not required to» withhold on payment made to exempt recipients. Backup withholding also; is not required with respect to any other reportable payment (except barter exchange transactions reportable under section 6045) made to an exempt recipient described in § 31.3452{c)-l (fr) through (p) of the Employment Taxes and Collection of Income Tax at Source Regulations. A middleman, however;, shall include only a nominee or custodian known generally in the investment community as a nominee or listed in the most recent publication of the American Society of Corporate Secretaries, Inc. Nominee List. The exempt recipients described in this A-21 shall also be so treated for purposes of $ 1.6045-l(e)(3}(i) of the Income Tax Regulations.

      Foreign Persons

      Q-22. Will a form relating to exemptions for foreign persons be issued by the Internal Revenue Service?
      A-22. The Service is currently preparing Form W-8, on which a payee may sign, under penalties of perjury, the statement described in § 1.6049-5(b)(2)(iv) and § 1.6045-1 (g)(l) of the Income Tax Regulations, whichever is applicable. See A-51, A-52 and A-55 of § 35a.9999-l for other requirements. The Form W-8, however, may not be available prior to the time that payors intend to make the mailing or mailings, required by A-52 or A-55 of § 35a.9999-1. Accordingly, payors should use the substitute form described in § 1.6049-5(b)(2j(iv) or § 1.6045-l(g)(l), whichever is applicable, on which a payee may make the certifications concerning the payee's foreign status and provide his name, address, and taxpayer identification number (if any). If a payor sends a substitute Form W-9 to a payee, the payor may incorporate the required foreign status certification on the substitute Form W-9.

      Record Retention

      Q-23. Under what circumstances are payors required to retain the documents they receive from payees?
      A-23. With respect to a pre-1984 account or instrument (as defined in A-34 of § 35a.9999-l) or any brokerage relationship that is not a post-1938 account (as defined in A-41 of § 35a.9999-l), the payor is not required to retain either: (1) A form on which a payee certified concerning the correctness of a taxpayer identification number, or (2) an awaiting TIN certification, if the payor can establish the existence of procedures that are reasonably calculated to ensure that a payee who so certified is accurately identified in the payor's records-. With respect to all other accounts or instruments, however, payors are required to retain all certification documents in the same manner and for the same period of time that the payor retains other account-creation or instrument-purchase documents.

      Appendix

      Ths notice required by A-39 of § 35a.9999-1 and A-18, above, shall be substantially in the form provided below:

      Recently, you purchased, [identify security acquired]. Because of the existence of one or more of the following conditions, payments of interest, dividends, and other reportable amounts that are made to you will be subject to backup withholding of tax at a 20 percent rate: [specify the condition or conditions applicable)

      (1) You failed to provide a taxpayer identification number, or failed to provide such number under penalties of perjury, in connection with the purchase of the acquired: security. (An individual's taxpayer identification number is his social security number.)
      (2) The taxpayer identification number that you provided is not your correct number.
      (3) You are subject to backup withholding due to notified payee underreporting (section 3406(a)(l)(C) of the Internal Revenue Code).
      (4) You failed to certify that you are not subject to backup withholding due to notified payee underreporting (section 3406(a)(l)(D) of the Internal Revenue Code).

      If conditional) or (2) applies, you may stop withholding by providing your taxpayer identification number on the enclosed Form W-9, signing the form, and returning.it to us. If you do not have a taxpayer identification number, but have (or will soon) apply for one,-you may so indicate on the Form W-9; in that case, you will not be subject to withholding for a period of 60 days, but you must provide us with your taxpayer identification number promptly after you receive it in order to avoid withholding after the end of the 60-day period. Certain persons, described on the enclosed Form W-9, are exempt from withholding. Follow the instructions on that form if applicable to you.

      If condition (3) applies, and you do not believe you are subject to withholding due to notified payee underreporting, please contact your local Internal Revenue Service office.

      If condition (4) applies, you may stop withholding by certifying on the enclosed. Form W-9 that you are not subject to backup withholding due to notified payee underreporting, signing the form, and returning it to us.

      If more than one condition applies, you must remove all applicable conditions ta stop withholding.

      Please address any questions concerning this notice to:

      [Insert Payor Identifying Information]

      (Do not address questions to the broker who purchased the securities for you.)

      Par. 2. Question 42 (Q-42) of § 35a.9999-l is amended by removing the phrase "Treasury bills," in the question thereof.

      There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure, under subsection (b) of section 553 of" Title 5 of the United States Code of subject to the effective date limitation of subsection (d) of that section.

      This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c), (e), (g), (h), and (i), section 6041, section 6041A(a), section 6042(aj; section 6044(a), section 6045, section 6049 (a), (b), and (d), section 6103fq), section 6109, section 6302(c), section 6676, and section 7805 of the Internal Revenue Code of 1954 (97 Stat. 371, 37Z, 373, 376, 377, 378, 379; 26 U.S.C. 3406, (a), (b), (c), (e), (g), (h), and (i), 68A Stat. 745; 26 U.S.C. 6041, 96 Stat. 601; 26 U.S.C. 6041A(aJ, 96 Stat. 587; 26 U.S.C. 6042{a), 96 Stat. 587; 26 U.S.C. 6044(a), 96 Stat. 600. 26 U.S.C. 6045, 96 Stat. 592, 594, 26 U.S.C. 6049 (a), (b), and (d), 90 Stat. 1667, 26 U.S.C. 6103(q), 75 Stat. 828; 26 U.S.C. 6109, 68A Stat. 775, 26 U.S.C. 6302(c), 68A Stat. 917; 26 U.S.C. 7805) and in sections 104,105, and 108 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371, 380, and 383).

      M. Eddie Heironimus,
      Acting Commissioner of Internal Revenue.

      Approved:

      Ronald A. Pearlman,
      Acting Assistant Secretary of the Treasury.

      [FR. Doc. 83-31748 Filed 11-22-83; 3:39 pm]

      BILLING CODE 4830-01-M

      DEPARTMENT OF THE TREASURY

      Internal Revenue Service

      26 CFR Part 35a

      [T.D. 7929]

      Temporary Employment Tax Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Temporary regulations.

      SUMMARY: This document provides temporary regulations relating to backup withholding. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369). These regulations affect payors and payees of, and brokers with respect to, reportable payments and provide them with the guidance necessary to comply with the law. This document also clarifies A-21 of § 35a. 9999-2 of the Temporary Employment Tax Regulation.

      DATES: The temporary regulations are effective for payments made after December 31, 1933.

      FOR FURTHER INFORMATION CONTACT: Yerachmiel Weinstein (at 202-566-3289 with respect to the foreign provisions), Bruce Jurist (at 202-566-3238 with respect to broker transactions), and Diane Kroupa (at 202-566-3590 with respect to all other provisions) of the Legislation and Regulations Division of the Office of Chief Counsel. Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, D.C. 20224.

      SUPPLEMENTARY INFORMATION:

      Background

      On October 4, 1983, the Federal Register published Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (48 FR 45362). Those amendments were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369). Section 3406 was added to the Internal Revenue Code of 1954 by section 104 of the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 371), and section 6676 of the Code was amended by section 105 of the Act (Pub. L. 98-67. 97 Stat. 380).

      Additional temporary regulations relating to the requirement to impose backup withholding on reportable payments and the exercise of due diligence by payors of reportable interest, dividends, and patronage dividends and brokers were published in the Federal Register (48 FR 53104) on November 25, 1983.

      This document, containing additional temporary regulations relating to the requirement to impose backup withholding, adds new § 35a.9999-3 to Part 35a, Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983. to Title 26 of the Code of Federal Regulations. Because these provisions are generally effective for payments made after December 31, 1983, there is a need for immediate guidance so that payors and payees can prepare to comply with these provisions.

      The Internal Revenue Service intends to publish a notice of proposed rulemaking in the Federal Register in the near future that will provide comprehensive rules regarding backup withholding. All pertinent provisions of the temporary regulations with respect to backup withholding will be incorporated in the notice of proposed rulemaking. The notice of proposed rulemaking will provide the public an opportunity to comment on the regulations. A public hearing will be held. Notice of the time and place of the public hearing will be published in the Federal Register. The temporary regulations contained in this document and §§ 35a.9999-l and 35a.9999-2 will remain in effect until superseded by final regulations on this subject.

      These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which payors and payees of reportabie payments (including reportable interest, dividend, and patronage dividend payments) may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.

      Explanation of Provisions

      The regulations provide additional guidance concerning the application of backup withholding to payments subject to reporting under section 6041 (relating to rents, royalties, commissions, etc.), section 604lA(a) (relating to nonemployee compensation), section 6042 (relating to dividends), section 6044 (relating to patronage dividends), section 6045 (relating to brokers and barter exchanges), section 6049 (relating to interest and original issue discount), and section 6050A (relating to certain fishing boat operators). A payment must be subject to information reporting under one of those provisions before backup withholding can apply. Thus, if a payment is not subject to information reporting, backup withholding cannot apply to the payment. With respect to payments subject to reporting under section 6O4lA(a), these regulations provide that the exceptions currently applicable under section 6041 shall apply until regulations are issued under section 6041A (LR-214-82). For example, payments made to certain corporations engaged in providing medical and health care services are not excepted from information reporting under sections 6041 or 6041A and also are not excepted from backup withholding if a condition for imposing withholding exists with respect'to the payee.

      In addition, these regulations provide that certain amounts that are subject to information reporting are not subject to backup withholding. For example, a premature withdrawal penalty with respect to a time savings account, a certificate of deposit or similar deposit, does not reduce the amount of interest that is subject to information reporting, but, in the payor's discretion, only the net payment is subject to backup withholding. In addition, the regulations describe certain categories of dividends that are not subject to backup withholding.

      Payments of interest to a mortgage escrow account at a financial institution and interest earned on certain premiums paid with respect to an insurance policy are reportable payments and thus may be subject to backup withholding. While such payments were exempt from 10 percent withholding on interest and dividends, the underlying purpose of backup withholding is to ensure that payees' taxpayer identification numbers are provided on information returns in order to match the information with the payee's income tax return. Thus, such payments will be subject to backup withholding.

      These regulations define "an obviously incorrect number", delineate how ofien withholding applies, and describe the penalties associated with backup withholding.

      Special rules are provided with respect to readily tradable instruments. When a readily tradable instrument is acquired in a transaction between parties unrelated to the payor and without the assistance of a broker, no certification is required.

      These regulations also provide special rules when an account is established directly with, or an instrument is acquired directly from, the payor. If acquisition is effected by means of electronic transfer, the payee, at the payor's option, is given 30 days after such acquisition to provide the required certifications before the payor is obligated to impose backup withholding or. any reportable interest and dividends, provided that the payee furnishes a taxpayer identification number to the payor at the time of the acquisition. The payor must, however, withhold 20 percent of the reportable amount if the payee withdraws any funds before the certifications are received. If the acquisition is by means of mail communication, the special rule applies with respect to acquistions before January 1, 1985.

      The amount subject to backup withholding is generally the amount subject to information reporting. The amount subject to backup withholding with respect to patronage dividends and payments of certain fishing boat operators is limited generally to the amount paid in cash (or paid by qualified check in the case of Datronage dividends). Special rules are provided'to show the amount subject to backup withholding with respect to short sales, futures contracts, margin accounts, and foreign currency contracts.

      In addition, the regulations explain that while withholding from an alternative source generally is not available to payors as under the now. repealed provisions of 10 percent withholding on interest and dividends, payors of payments in property may withhold from an alternative source if the payee is subject to backup withholding.

      The regulations prescribe rules governing the confidentiality of the information the payor receives in connection with backup withholding. In addition, the penalty associated with wrongful disclosure is described.

      The regulations explain when withholding under section 3406(a)(l) (A) and (D) is requried to stop. In general, if a payor is withholding because he has not received a taxpayer identification number or a required certification, the payor must stop withholding on the date that the payor receives a taxpayer identification number from the payee in the manner required or the date that the payor receives the required certification, as applicable. Under A-17 of § 35a.9999-2 a payor has 30 days in which to treat a taxpayer identification number or required certification as having been received.

      The regulations also explain the circumstances in which erroneously withheld amounts may be refunded to the payee. In general, a payor may refund taxe3 to the payee if, due to the payor's error, the payor improperly withholds. A payor may not refund taxes withheld due to a payee's error or failure to provide a taxpayer. identification number or a required certification. For example, if a payor withholds because no taxpayer identification number has been received by the payment date, the payor may not refund the tax to the payee even though the payee subsequently furnishes the taxpayer identification number in the manner required to the payor before an information return is required to be made. In this situation, the payor properly withheld. A payor may only refund the tax if the payor has made an error in withholding.

      The regulations provide that if a payor is required to withhold, the payor is required to make an information return and is required to furnish a statement to . the recipient showing the amount paid and the amount of tax withheld. Thus, the payor is required to make an information return whenever the payor imposes backup withholding even though the amount of the payment is less than the minimum amount that generally must be paid before an information return is required to be made.

      The regulations also provide rules for determining whether a payor has exercised due diligence with respect to an account opened or an instrument acquired after December 31, 1983.

      Several persons questioned whether various types of interest payments which are not subject to information reporting under section 6049 are, nevertheless, subject to backup withholding. If a payment is not subject to information reporting, it is not subject to backup withholding. These regulations generally do not change any information reporting responsibilities under section 6049. For example, interest which is exempt from taxation under section 103 (relating to certain governmental obligations) is not a reportable payment. If the holder of a tax exempt obligation provides written certification to the payor that the interest payment is exempt from taxation, the payor is not required to make an information return under § 1.6049-5(b)(l)(ii). Because such a payment is not subject to information reporting, the payor is not required to impose backup withholding. Similarly, interest paid by an individual on its own obligation (i.e., a mortgage) is not a reportable payment under § 1.6C49-5(b)(l)(i) and, accordingly, the individual has no backup withholding responsibilities. The result is the same irrespective of whether such interest is collected on behaif of the holder of the obligation by a middleman. Amounts paid with respect to repurchase agreements, however, are reportable under section 6049 and accordingly backup withholding applies to such reportable interest amounts. Thus, as with any account that is not a pre-1984 account, the payee is required to make the certifications described in A-32 of § 35a.9999-l with respect to repurchase agreements.

      Clarification has also been requested with respect to the application of backup withholding to original issue discount. Answer 15 of § 35a.9999-2 restates that the amount of original issue discount includible in the holder's gross income is treated as a payment of interest under section 6049(d)(6) and § 1.6049-5(c). Original issue discount is, therefore, subject to backup withholding. Answer 15 of § 35a.9999-2 also provides that the rules of 10 percent withholding on interest and dividends shall apply for purposes of determining the amount of original issue discount subject to backup withholding. Thus, backup withholding only applies to original issue discount when a cash payment is made to the payee, such as a payment of stated interest, or at redemption of the obligation at maturity. When interest payments are made on a long-term registered obligation with original issue discount, backup withholding applies to the stated interest plus the amount of original issue discount includible in ths gross income of the holder during the calendar year (although the amount to be withheld cannot exceed the cash paid). In the case of a short-term obligation or a long-term obligation in bearer form, backup withholding with respect to original issue discount applies only at maturity of the obligation. At maturity of a long-term original issue discount obligation in bearer form, backup withholding applies only with respect to the amount of original issue discount includible in gross income of the holder for the calendar year in which the obligation matures.

      If a person purchases an original issue discount obligation from another holder, the purchaser generally does not have to impose backup withholding. If, however, a broker was involved with respect to the sale of the obligation and was required to make an information return under section 6045, the broker would be required to impose backup withholding on the gross proceeds of the sale of the obligation. Similarly, if a person purchases a bond between interest payment dates, backup withholding generally only applies when the interest i3 paid. If however, a broker was involved with respect to the sale of the obligation and was required to make an information return under section 6045, the broker would be required to impose backup withholding on the gross proceeds of the sale of the obligation.

      Clarification has also been requested with respect to readily tradable instruments. A payor may assume that the taxpayer identification number received from a broker with respect to a readily tradable instrument is furnished in the manner required unless and until the broker notifies the payor otherwise as required in A-41 of § 35a.9999-l. If the broker notifies the payor that the payee is subject to backup withholding, the payor generally is required to impose backup withholding and is required to notify the payee as provided in A-39 of § 35a.9999-l and A-18 of § 35a.9999-2 that backup withholding has commenced, or will commence. For purposes of backup withholding, the term readily tradable instrument includes shares in a mutual fund. For purposes of A-41 of § 35a.9999-l, the term "transfer instructions" includes account registration instructions transmitted by a broker with respect to acquisitions of shares in a mutual fund.

      With respect to the manner of delivery of Forms 1099 of reportable interest or dividend payments made in 1984 and in subsequent years, a payor of such payments is required either to deliver personally an .official Form 1099 or to mail the form in a separate first-class mailing to the payee. If a payor of reportable interest or dividends made in 1984 does not personally deliver or mail the Form 1099 in a separate first-class mailing to the payee, the payor shall be considered to have failed to furnish the required statement to the payee, and the payor will be subject to a $50 penalty for each failure under section 6678. The only material that may be included in the separate mailing of Form 1099 is information relating to solicitation of the payee's correct taxpayer identification number. Payors may not include Form 1099 in the same envelope used to mail a payment such as where a United States savings bond is redeemed by mail. Payors are not required to send a separate Form 1099 for each interest or dividend payment but may aggregate payments made to a payee during a calendar year on one Form 1099. Payors will be allowed to use a substitute Form 1099 provided the specifications of the applicable Revenue Procedure are followed.

      Nonapplicability of Executive Order 12291

      The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.

      Regulatory Flexibility Act

      No general notice of proposed rulemaking is required by 5 U.S.C. 553 (b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.

      Drafting Information

      The principal authors of these regulations are Diane Kroupa, Bruce Jurist, Pam Olson, and Yerachmiel Weinstein of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. Personnel from other offices of the Internal Revenue Service and the Treasury Department participated, however, in developing the regulations on matters of both substance and style.

      List of Subjects in 26 CFR Part 35a

      Employment taxes, Income taxes, Backup withholding, Interest and Dividend Tax Compliance Act of 1983.

      Adoption of amendments to the regulations. Accordingly, Part 35a is amended as follows:

      Paragraph 1. Section 35a.9999-3 is added immediately after § 35a.9999-2 to read as follows:

      § 35a.9999-3 Questions and answers concerning backup withholding.

      The following questions and answers principally concern the backup withholding requirement with respect to reportable payments. These requirements are issued under the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369):

      In General

      Q-l. Who has the legal obligation to withhold on reportable payments made to a payee who is subject to backup withholding?
      A-l. The person required to withhold {the payor) is the person who is required by the applicable provision to make an information return with respect to a payment under section 6041, 604lA(a), 6042, 6044, 6045, 6049, or 6050A. For example, in the case of a person who has a paying agent making a reportable payment to a payee, the paying agent is not the payor but is merely an agent for the principal (payor). In the case of a payment which is collected on behalf of, or for the account of, a payee, the payor ("middleman") is the person collecting or receiving the payment, irrespective of whether he is acting as the agent of the payee, or as agent for the issuer of the instrument. For example, a payee may establish a custodial account with a financial institution or brokerage firm where instruments are held for the benefit of the payee. The interest or dividends may be paid to a nominee of the financial institution or brokerage firm. The financial institution or brokerage firm will, in turn, credit the payee's custodial account. The financial institution or brokerage firm is the payor since it receives and credits payment to the payee's account and is required to make an information return snowing such payment to the payee. See A-20 of § 35a.9999-2 for special rules related to grantor trusts.
      Q-2. What consequences result if a payor fails to withhold on payments made to a payee who is subject to backup withholding?
      A-2. A payor is subject to the same requirements and penalties for failing to impose backup withholding as an employer making a payment of wages. Consequently, under section 3403 and § 31.3403-1 of the Employment Taxes and Collection of Income Tax at Source Regulations, a payor is liable for the tax whether or not the payor withholds the tax from a payee who is subject to backup withholding. A payor may be relieved of liability for the tax which was required to be withheld if the payor can show that the tax has been paid by the payee, as provided in section 3402(d) and § 31.3402(d)-l of the Employment Taxes and Collection of Income Tax at Source Regulations. In addition to liability for the tax, a payor who fails to withhold when required may be subject to civil penalties under section 6651 (addition to the tax for failure to pay any tax required to be shown on the payor's return), section 6656 (penalty for failure to make deposit of taxes) and section 6672 (penalty for failure to collect and pay over tax) and to criminal penalties under section 7201 (penalty for willfully attempting to evade or defeat any tax or the payment of any tax), section 7202 (penalty for willful failure to collect or pay-over any tax), and section 7203 (penalty for willful failure to pay tax). The fact that a payor shows that the tax has been paid by the payee will not relieve the payor of liability for any civil or criminal penalty. The payor is not liable to any person for any withheld amount. The payor will only be liable to the United States for the tax which was required to be withheld as provided in § 31.3403-1 of the Employment Taxes and Collection of Income Tax at Source Regulations.

      Requirement to Withhold

      Q-3. Is a payor required to withhold if the taxpayer identification number furnished by a payee is an "obviously incorrect number"?
      A-3. Yes. As provided in A-28 nf § 35a.9999-l, a payee shall be treated as having failed to furnish a taxpayer identification number to the payor if the number furnished is obviously incorrect. An obviously incorrect number is any taxpayer identification number that does not contain nine digits or a number that includes one or more alpha characters.
      Q-4. When are payments considered to be paid and thus subject to backup withholding?
      A-4. With respect to reportable interest or dividends, backup withholding applies when the payor pays interest, dividends, or patronage dividends to a payee who is subject to backup withholding. Amounts are paid when they are credited to the account of or set apart for the payee. Amounts are not considered paid solely because they may be withdrawn by the payee, so long as they are not credited to the payee's account, until either actual withdrawal or a specified crediting date.

      Amounts are considered paid, however, upon withdrawal or crediting. If a bank credits interest on savings accounts only on the last day of each month or when the account is closed, then backup withholding applies at the time interest is paid on the last day of each month and when the account is closed.

      When bonds are sold between interest payment dates, the portion of the sales price representing interest accrued to the date of sale is not considered to be a payment of interest for purposes of section 6049, but will be considered a reportable payment under section 6045. Therefore, if the gross proceeds of the sale are subject to backup withholding under A-12 of § 35a.9999-2, 20 percent of the sales price, including the portion representing accrued interest, will be subject to backup withholding.

      In the case of stock for which the record date is earlier than the payment date, the dividend is considered paid on the payment date. For example, if a corporation declares a dividend on September 1 to the record holders as of September 12, and the dividends are payable on October 12, backup withholding applies on October 12 (the payment date). In the case of a corporate reorganization, if a payee is required to exchange stock held in the former corporation for stock in the new corporation before the dividends which have been paid with respect to the stock in the new corporation will be provided to the payee, the dividend is considered paid on the payment date without regard to when the payee actually exchanges the stock and receives the dividend.

      If a payor (such as a money market fund) computes interest or dividends daily but credits the interest or dividends on the last day of each month, then backup withholding applies on the last day of each month. If a payor computes and credits interest or dividends daily, backup withholding applies daily.

      With respect to any reportable payment other than reportable interest or dividends, backup withholding applies at the time the payment is made or in the case of a transaction reportable under section 6045 when the amount subject to backup withholding is determined. Except in the case of forward contracts, regulated futures contracts, and security short sales, the amount subject to backup withholding in the case of a transaction reportable under section 6045 is determined on the date of the sale or exchange. See § 1.6045-1 (d)(4) and (f)(3) of the Income Tax Regulations for the applicable sale or exchange date and A-23 through A-25 and A-27 for special rules applicable to forward contracts, regulated futures contracts, security short sales, and issuer payment of debt securities. The date by which the payor is required to make an information return is irrelevant for purposes of determining when the payment is made and thus subject to backup withholding.

      In the case of a middleman required to withhold tax, rules similar to § 31.3453(b)-l (b) of the Employment Taxes and Collection of Income Tax at Source Regulations shall apply. In the case of a United States savings bond, see § 1.6049-4(d)(9) of the Income Tax Regulations.

      Payments and Amounts Subject to Backup Withholding

      Q-5. Is interest paid on a mortgage escrow account with a financial institution or interest earned on certain premiums paid with respect to an insurance policy, subject to backup withholding?
      A-5. Yes. Both a payment of interest to a mortgage escrow account with a financial institution and a payment that represents an increment in value of "advance premiums," "prepaid premiums," or "premium deposit funds" which is applied to the payment of premiums due on an insurance policy, or is made available for withdrawal by the policyholder, are subject to reporting under section 6049 and thus are subject to backup withholding.
      Q-6. If a payor imposes a penalty for premature withdrawal of funds deposited in a time savings account. certificate of deposit, or similar class of deposit, is the payor required to calculate the tax to be withheld on the amount of the reportable interest payment (not reduced by any penalty)?
      A-6. No. A payor may, at its option, take into account any penalty it actually imposes on a payee when it calculates the amount to be withheld. If the payor chooses to take the penalty into account, the amount subject to backup withholding would be the amount of interest the payee actually receives. The gross amount of the payment, however, is subject to information reporting.
      Q-7. If a payor is able to estimate the portion of a distribution which is not a dividend, is the payor nevertheless required to impose backup withholding on the gross amount of the distribution?
      A-7. If the payor is unable to determine the portion of a distribution which is a dividend, backup withholding applies to the entire amount of the distribution. If a payor is able reasonably to estimate the portion of the distribution which is not a dividend, however, backup withholding does not apply to such portion. A payor making a payment all or a portion of which may not be a dividend may use previous experience to estimate the portion of such payment which is not a dividend. An estimate of the portion of a distribution which is not a dividend shall be considered reasonable If the estimate does not exceed the proportion of the distributions made by the payor during the most recent calendar year for which Forms 1099 and 1087 were required to be filed which was not reported by the payor as a dividend.
      Q-8. Are dividends which are reinvested in stock of the company subject to backup withholding?
      A-8. Dividends which are reinvested pursuant to a qualified plan in stock of a public utility are not subject to backup withholding. For this purpose, the amount of the reinvested dividend paid to any person, the identity of the recipient, and whether the recipient makes the election required by section 305(e)(2)(B) are irrelevant. All other reinvested dividends are subject to backup withholding.
      Backup withholding shall apply to the amount of any dividend available to the shareholder, or credited to the shareholder's account. At the discretion of the payor, backup withholding need not be applied: (1) To any excess of trie fair market value of the shares of stock received by the shareholder or credited to the shareholder's account over the purchase price of such shares (including additional shares acquired by the shareholder at a discount in connection with the dividend distribution) or (2) to any fee which is paid by the payor in the nature of a broker's fee for purchase of the stock or service charge for maintenance of the shareholder's account. The payor must, however, treat such excess amounts and fees on a consistent basis for each calendar year. Thus, the payor is not required to impose backup withholding on any amount in excess of the actual cash value of the dividend declared which the payee would have received had the payee not been a participant in the dividend reinvestment plan.
      Q-9. Are there any payments of dividends that are not subject to backup withholding?
      A-9. Yes. Backup withholding does not apply to—
      (i) Any amount treated as a taxable dividend by reason of section 302 (relating to redemptions of stock).
      (ii) Any amount treated as a taxable dividend by reason of section 306 (relating to disposition of certain stock).
      (iii) Any amount treated as a taxable dividend by reason of section 356 (relating to receipt of additional consideration in connection with certain reorganizations).
      (iv) Any amount treated as a taxable dividend by reason of section 1081(e)(2) (relating to certain distributions pursuant to an order of the Securities -and Exchange Commission).
      (v) Any amount which is an exempt-interest dividend, as defined in section 852(b)(5)(A), of a regulated investment company.
      (vi) Any amount paid or treated as paid during a year by a regulated investment company, provided that the payor reasonably estimates, as provided in A-7, that 95 percent or more of all dividends paid or treated as paid during the year are exempt-interest dividends.
      (vii) Any dividend that is reinvested pursuant to a qualified plan in stock of a public utility as provided in A-8.
      The foregoing exceptions do not apply to backup withholding on gross proceeds reportable under section 6045.
      Q-10. What amount of a payment reportable under section 6044 is subject to backup withholding?
      A-10. If a payee fails to provide his taxpayer identification number or, for relationships with or memberships in a cooperative that are established after December 31, 1983, fails to provide a taxpayer identification number under penalties of perjury, the amount subject to backup withholding is any amount subject to reporting under section 6044, but only to the extent that the payment is made in money or by qualified check (as defined in section 1388(c)(4}). Thus, the payor shall withhold 20 percent of the amount paid in money or by qualified check to a payee who has failed to provide a taxpayer identification number in the manner required. For example, if a cooperative pays a patronage dividend of $2,000, consisting of $200 in cash, $300 by a qualified check and $1,500 in a qualified written notice of allocation, the amount subject to backup withholding is $500 (the amount paid in money and by qualified check). Thus, if the payee failed to provide a taxpayer identification number in the manner required, the cooperative would be required to withhold 20 percent of the $500.
      If a payee (whose relationship with or membership in a cooperative was established after December 31, 1983) fails to certify that the payee is not subject to backup withholding due to notified payee underreporting, the amount subject to backup withholding is the amount of any payment reportable under section 6044 that is paid in money or by qualified check, but only if 50 percent or more of the reportable amount is paid in money or by qualified check. Therefore, in the case where there has been a payee certification failure, if a payment is made 50 percent or more in cash and by qualified check, the payor is required to withhold 20 percent of the amount of the cash and qualified check. If less than 50 percent of the payment is paid in cash or by qualified check, no amount is subject to backup withholding. For example, if a cooperative pays a patronage dividend consisting of $350 in cash, $250 by a qualified check, and $400 in a qualified written notice of allocation, 20 percent of $600 (the amount paid in money and by qualified check) is required to be withheld if there is a payee certification failure. If $100 were paid in cash, $250 by a qualified check, and $650 in a qualified written notice of allocation, however, the payment would not be subject to backup withholding even though there is a payee certification failure because less than 50 percent of the patronage dividend is paid in cash or by qualified check.
      Q-ll. If a payor makes a reportable payment in property (other than money), is the payor required to impose backup withholding?
      A-ll. Yes. In the case of a payment that is made in property, backup withholding applies to the fair market value of the property determined on the date of payment except in the case of certain payments subject to reporting under section 6050A.
      Q-12. If the payor is required to withhold on a payment made in property, in what manner may the payor withhold?
      A-12. The payor may withhold on the principal amount being deposited with the payor, or the payor may withhold from another account or source maintained by the payor for the payee. The account or source from which such tax is withheld must be payable to at least one of the persons listed on the account subject to backup withholding. If the account or source is not payable solely to the same person or persons listed on the account subject to backup withholding, then the payor must obtain a written statement from all other persons to whom the account or source is payable authorizing the payor to withhold the tax from such account or source. The payor electing to withhold from an alternative source may determine the account or source from which the tax is to be withheld. The payor is liable for any tax that is required to be withheld if the recipient of the payment is subject to backup withholding. A payor may not withhold from an alternative source except with respect to payments in property.

      Amounts Subject to Reporting Under Section 6041 or 604l A(a)

      Q-13. Under what circumstances will a payment of a type subject to information reporting under section 6041 be exempt from backup withholding?
      A-13. An information return is not required to be made with respect to payments described in § 1.6041-3 of the Income Tax Regulations and, therefore, such payments are not subject to backup withholding. In addition, payments otherwise reportable under section 6041 that are made to the following persons will not be subject to backup withholding:
      (i) An organization exempt from taxation under section 501(a), or an individual retirement plan,
      (ii) The United States,
      (iii) A State, the District of Columbia, a possession of the United States, or any political subdivision of any of the foregoing,
      (iv) A foreign government or political subdivision of a foreign government,
      (v) An international organization,
      (vi) Any wholly owned agency or instrumentality of any person described in (ii), (iii), (iv), or (v), or
      (vii) A foreign central bank of issue.
      The provisions of § 31.3452(c)-l of the Employment Taxes and Collection of Income Tax at Source Regulations shall apply for the purpose of determining whether a payee to whom a payment is made is subject to information reporting and backup withholding. For example, during 1984, payor K, in the course of its trade or business makes a payment of rent of $700 to R Inc. for the use of premises owned by R Inc. Under § 1.6041-3(c) of the Income Tax Regulations payments to a corporation are not subject to information reporting (except in the ca3e of certain payments not relevant here). Under § 31.3452(c)-l(b)(2) of the Employment Taxes and Collection of Income Tax at Source Regulations, K may treat R Inc. as a corporation because its name contains the unambiguous expression of corporate status, "Inc." Because the payment of rent to R Inc. is not subject to information reporting, it is not subject to backup withholding. If, however, K made the payment of rent to S Company, K would not be authorized to treat S Company as a corporation because "company" is not an unambiguous expression of corporate status. See § 31.3452(c)-l(b)(2) of the Employment Taxes and Collection of Income Tax at Source Regulations. Accordingly, K would be required to make an information return with respect to the payment under sections 6041 and withhold 20 percent of the payment to S Company, if S Company did not furnish a taxpayer identification number to K.
      Q-14. Do the exceptions under section 6041 and the regulations thereunder apply to payments subject to reporting under section 604lA(a)?
      A-14. For purposes of both information reporting and backup withholding, the exceptions under section 6041 shall apply to payments of a type reportable under section 6041A until regulations are issued under section 6014A; the rules of A-13 shall apply to such payments. Thus, in general, payments of the type reportable under section 604lA(a) that are made to corporations or general agents are not subject to information reporting or backup withholding. (See A-15 relating to payments to certain medical corporations.)
      Q-15. Does backup withholding apply to a payment importable under section 6041 or section 604lA(a) that is paid to a corporation engaged in providing medical and health care services or engaged in the billing and collection of payments in respect of medical and health care services (other than certain tax-exempt or governmental facilities described in § 1.6041-3(c) (1) and (2) of the Income Tax Regulations)?
      A-15. Yes. Such amounts are subject to information reporting under section 6041 and 604lA(a) and thus are subject to backup withholding. The exception from backup withholding for payments to exempt recipients (described in A-21 of § 35a.9999-2) does not apply in the case of payments that are subject to reporting under sections 6041, 6041A(a) or 6050A.
      Q-16. Does backup withholding apply to oil royalty payments that are subject to reporting under section 6041?
      A-16. Backup withholding does not apply to an oil royalty payment if windfall profit tax is actually withheld under section 4986. If windfall profit tax is not actually withheld from the oil royalty payment (because, for example, payment is made with respect to "exempt royalty oil" (as defined in section 4993(f)), the oil royalty payment is subject to backup withholding. The amount subject to backup withholding is the amount the payee receives [i.e., the gross proceeds less production related taxes such as State severance tax). The payor shall not be liable to any person other than the United States for the amount of tax withheld.
      Q-17. Does backup withholding apply to net commissions paid to an unincorporated special agent with respect to insurance policies that are subject to reporting under section 6041?
      A-17. Backup withholding does not apply to commissions reportable with respect to such an unincorporated special agent, provided that no cash is actually paid by the payor to the special agent.
      Q-18. Does backup withholding apply to "designated distributions" (as defined in section 340S(d)(l)) if the distribution is not subject to reporting under section 6041?
      A-18. No. As specified in A-30 of § 35a.9999-l, backup withholding applies only to distributions from pensions, annuities, or other plans of deferred compensation that are subject to reporting under section 6041. Thus, the following distributions are among those exempt from backup withholding because they are not subject to reporting under section 6041: (1) Distributions from an individual retirement account (subject to reporting under sections 408(i) and 6047(d)); (2) distributions from en owner-employee plan (subject to reporting under section 6047(b)); (3) certain surrenders of life insurance contracts (subject to reporting under section 6047(e)); and (4) distributions from a qualified bond purchase plan (subject to reporting under section 6047(c)).
      Q-19. Does backup withholding apply to payments of gambling winnings that are subject to reporting under section 6041?
      A-19. Backup withholding does not apply to any portion of reportable gambling winnings with respect to which tax is actually withheld under section 3402(q). In any case in which the reportable gambling winnings are not withheld upon under section 3420(q), backup withholding applies. Thus, gambling winnings reportable under section 6041 are subject to backup withholding if the payee does not furnish a taxpayer identification number and the payment is not withheld upon under section 3402(q). Answer 11 of §35a.9999-2 does not apply to gambling winnings. Thus, the payor is not required to determine whether any of the three conditions specified therein applies with respect to the payee.

      For purposes of information reporting and backup withholding, (1) the reportable gambling winnings is the amount paid with respect to the amount of the wager reduced, at the option of the payor, by the amount of the wager, and (2) amounts paid with respect to identical wagers are treated as paid with respect to a single wager for purposes of calculating the amount of proceeds from a wager. The determination of whether amounts paid with respect to a single wager are identical shall be made under the rules of § 31.3402(q)-(l,)(c)(l)(ii) of the Employment Taxes and Collection of Income Tax at Source Regulations. In addition, until further regulations are issued, gambling winnings in excess of $6OO are reportable only if the payout is based on betting odds of 300 to 1, or higher. The applicability of the odds requirement to information reporting and backup withholding is being studied by the Service and is subject to change in further regulations. Notwithstanding the odds requirement, winning from bingo, keno, and slot machines are subject to backup withholding if reportable under § 7.6041-1 of the temporary Income Tax Regulations.

      Definition of a pre-1974 Account

      Q-20. Under what circumstances is an account or instrument treated as a pre-1984 account?
      A-20. Answer 34 of § 35a.9999-1 describes generally the accounts and instruments that are treated as a pre-1984 account. In addition, the purchase of additional shares in a credit union, where a prime account existed before 19S4, shall be considered a pre-1084 account. If funds taken from one account, in existence prior to January 1, 1984, are used to create a new account on or after such date, however, the new account generally does not constitute a pre-1984 account. For example, with respect to a disposition of shares in a mutual fund and the purchase of shares of another fund within a group of mutual funds which occurs after December 31, 1983, the shares acquired in the second fund are not treated as a pre-1984 account unless the payee owned shares in the second fund prior to January 1, 1984.

      If a shareholder is enrolled before January 1, 1984, in a dividend reinvestment program to purchase additional shares of the corporation sponsoring the program, the shares acquired through the program are considered a pre-1984 account, in the discretion of the payor. In the case of a qualified employee trust that distributes instruments in kind, any instrument distributed from the trust will be considered a pre-1984 account with respect to employees who were participants in the plan before January 1, 1984. Similarly, when a payor offers participants in a plan the opportunity to purchase stock of the payor after a specified time using the money that the payee invested during that period of time, the stock so purchased after December 31, 1983, shall be considered a pre-1984 account with respect to participants in the plan who either owned shares or invested money in the plan before January 1, 1984.

      An instrument with respect to which a broker is the payor is a pre-1984 account if the brokerage account in which the instrument is held is not a "post-1983 account." Answer 41 of § 35a.9999-l describes generally the manner of determining whether a brokerage relationship is a post-1983 account. In addition, a brokerage relationship will not be treated as a post-1983 account if (i) a broker redeems or repurchases securities which were acquired by the seller prior to January 1, 1984, and (ii) either (A) the issuer of the securities is the broker obligated to make an information return under section 6045 or (B) the broker was obligated during 1983 to redeem the securities.

      Brokerage Accounts and Transactions

      Q-21. Does backup withholding apply to bonds the interest from which is exempt from taxation under section 103?
      A-21. Interest on a tax-exempt obligation is not reportable under section 6049 if the payee provides a written certification to the payor (other than the issuer) that interest on the obligaticn is exempt from tax. See § 1.6049-5(b)(l)(ii) of the Income Tax Regulations. If the interest is not reportable under section 6049, it is not subject to backup withholding. A broker, however, is required to report the gross proceeds of a sale of a tax-exempt bond (including redemption of the bond at maturity) under section 6045. Thus, the gross proceeds from the sale of such a bond are subject to backup withholding. Any accrued and unpaid tax-exempt interest included in the sales proceeds is not reportable under § 1.6045-l(d)(3) of the Income Tax Regulations. Accordingly, backup withholding is not required with respect to the portion of the proceeds of the sale that represents accrued tax-exempt interest.
      Q-22. Does backup withholding apply to a redemption of a share in a mutual-fund?
      A-22. Generally, yes. A redemption of shares of a mutual fund (other than a redemption at an issue price described in § 1.6O45-l(c)(3)(iv) of the Income Tax Regulations) is a reportable payment under section 6045, and thus the gross proceeds are subject to backup withholding if the fund is considered a broker or a broker is otherwise involved.
      Q-23. What amounts are subject to backup withholding upon the disposition of forward contracts or regulated futures contracts?
      A-23. If a'customer is subject to backup withholding with respect to an account containing forward contracts or regulated futures contracts, the broker must withhold 20 percent of the following amounts:
      (i) All cash or property withdrawn from the account by the customer during the year. A withdrawal includes the use of money or property in the account to purchase any property other than property acquired in connection with the closing of a contract. For this purpose, the acceptance of a warehouse receipt or other taking delivery to close a contract is in connection with the closing of a contract only if the property acquired is disposed of by the close of the seventh trading day following the trading day that the customer takes delivery under the contract. In addition, the making delivery to close a contract is in connection with the closing of a contract only if the broker is able to determine that the property used to close the contract was acquired no earlier than the seventh trading day prior to the trading day on which delivery is made. Cash withdrawals do not include repayments of debt incurred in connection with a making or taking delivery that meets the requirements of the preceding three sentences. A withdrawal also does not include payments of variation margin, commissions; fees, a transfer of cash from the account to another futures account that is subject to the rules of this A-23, or cash withdrawals traceable to dispositions of property other than futures (not including profit on the contract separately reportable under § 1.8045-l(c)(5)(i)tf) of the Income Tax Regulations).
      (ii) The amount of cash in the account available for withdrawal by the customer at the relevant year-end (as described in § 1.6045-l(c)(5) of the Income Tax Regulations).
      The payor must include the amount withheld and the amounts subject to withholding, in addition to the amounts otherwise reportable under section 6045, on the Form 1099-B filed with respect to a customer who is subject to backup withholding. The determination of whether the customer is subject to backup withholding should be made at the time of (1) the cash or property withdrawals or (2) the relevant year-end, whichever is applicable.
      Q-24. What amount is subject to backup withholding with respect to security sales made through a margin account?
      A-24. The amount subject to backup withholding in the case of a security sale made through a margin account (as defined in 12 CFR section 220 (Regulation T)) is the gross proceeds (as defined in § 1.6045-l(d)(5) of the Income Tax Regulations) on such sale. The amount required to be withheld with respect to such a sale, however, is limited to the amount of cash available for withdrawal by the customer immediately after the settlement of the sale. For this purpose, the amount available for withdrawal by the customer does not include amounts required to satisfy margin maintenance under: Regulation T, rules and regulations of the National Association of Securities Dealers and national securities exchanges, and generally applicable self-imposed rules of the margin account carrier. Thus, for example, if the broker forces a customer sale to meet the requirements of Regulation T (a maintenance call), none of the proceeds of such a sale are subject to backup withholding (except to the extent of the fractional amount of the last share sold which exceeds the amount needed to meet the Regulation T margin requirement).
      Q-25. What amount is subject to backup withholding with respect to security short sales?
      A-25. The amount subject to backup withholding with respect to a short sale of securities is ordinarily the gross proceeds (as defined in § 1.6045-l(d)(5) of the Income Tax Regulations) on such short sale. At the option of the broker, however, the amount subject to backup withholding may be the gain upon the closing of the short sale (if any) and the obligation to withhold can be deferred until the closing. A broker may use this alternative method of determining the amount subject to backup withholding with respect to a short sale only if at the time the short sale is initiated the broker expects that the amount of gain realized upon the closing of the short sale will be determinable from the broker's records. If, due to events unforeseen at the time the short sale was initiated, the broker is unable to determine the basis of the property used to close the short sale, the property shall be assumed to have a basis of zero. The determination of whether a short seller is subject to backup withholding shall be made on the date (1) of the initiation or closing, as the case may be, or (2) that the initiating or closing, as the case may be, is entered on the broker's books and records.
      Q-26. How does backup withholding apply to foreign currency contracts (as defined in section 1256(8))?
      A-26. In general, brokers shall report with respect to foreign currency contracts in accordance with the rules for reporting with respect to regulated futures contracts (see § 1.6045-l(c)(5)). For purposes of § 1.6045-l(c)(5)(i)(£) of the Income Tax Regulations realized profit (or loss) from a foreign currency contract is determined—
      (1) In the case of making or taking delivery, by comparing the contract price to the spot price for the contract currency at the time and place specified in the contract, and
      (2) In the case of a closing by entry into an offsetting contract, by comparing the contract price to the price of the offsetting contract.
      For purposes of § 1.6045-l(c)(5)(i) (c) and [d], unrealized profit in a foreign currency contract is determined by comparing the contract price to the broker's price for similar contracts at the close of business of the relevant year. Appropriate additions will be made to § 1.6045-l(c) of the Income Tax Regulations in the near future. For rules determining the amount subject to backup withholding under § 1.6045-l(c)(5), see A-23.
      Q-27. When does backup withholding apply to payments arising as a result of the retirement or redemption of a debt security subject to reporting under section 6045?
      A-27. In general, backup withholding applies on the sale date under § 1.6045-l(d)(4) of the Income Tax Regulations. Additionally, a broker that is also the obligor on a debt security may elect to apply backup withholding on the payment date. Such a broker must determine whether backup withholding applies on the same date (either sale date or payment date) with respect to all similarly situated payees.

      Special Rules With Respect to Readily Tradable Instruments

      Q-28. Do spscial rules apply if an account or instrument is acquired directly from the payor or reportable interest or dividends after December 31, 1983?
      A-28. Yes. Special rules apply depending on the manner in which the instrument is acquired. In the case of a readily tradable instrument acquired directly from the payor by means of electronic transmission [e.g., telephone or wire transfer), the payee, at the payor's option, shall be given 30 days after such acquisition to provide the certifications required in A-32 of § 35a.99S9-l, before the payor is required to impose backup withholding on the reportable interest or dividends, Provided That the payee furnishes a taxpayer identification number to the payor at the time of the acquisition. If the payee withdraws any of the interest or dividends before the certifications are received, however, the payor must withhold 20 percent of the reportable amounts. For purposes of the preceding sentence, all cash withdrawals in an amount up to the reportable amounts are assumed to be interest or dividends. In addition, the payor must commence withholding on all reportable interest or dividends in connection with the instrument or account 30 days after the acquisition, if the payee has not provided the required certifications to the payor by such date.
      The special.rule described in the preceding paragraph shall also supply to acquisitions that are effected before January 1, 1985, by mail communication. With respect to accounts or instruments acquired by mail or after January 1, 1985, the payor is required to impose backup withholding on the reportable interest or dividend payments if the payee has not provided the required Certifications at the time that the first reportable payment is made.
      Q-28A. Do special rules apply if a broker sells securities for a customer pursuant to a telephone instruction, in circumstances in which the customer failed to provide a certified taxpayer identification number as required by A-12 of § 35a.9999-2?
      A-28A. Yes. The customer, at the payor's option, shall be given 30 days after the date of the sale to furnish a certification as required by A-12 of § 35a.9999-2, provided that (1) the payee furnishes his taxpayer identification number before the sale and (2) the customer does not withdraw the proceeds of the sale prior to the time the required certification is provided (or backup withholding is applied). For purposes of the preceding sentence, an investment of the cash proceeds of the sale in other property shall be considered a withdrawal by the customer; however, investment in other property shall be permitted if, at all times, at least 20 percent of all gross proceeds reportable under section 6045 are held in cash by the broker. If the customer does not provide the required certification within 30 days after the date of the sale, the broker must withhold 20 percent of all reportable gross proceeds on the 31st day after the date of the sale.
      Q-29. If a readily tradable instrument is transferred in a transaction between partie3 unrelated to the payor of the instrument without the assistance of a broker, is the transferee required to certify either the correctness of the taxpayer identification number or that the transferee is not subject to backup withholding due to notified payee underreporting?
      A-29. No. Certification is not required in the case of a transfer of a readily tradable instrument between parties unrelated to the payor if the parties act without the assistance of a broker.
      Q-30. If a bond in bearer form is redeemed by the obligor after December 31, 1983, is the payee required to certify under penalties of perjury the correctness of the payor's taxpayer identification number?
      A-30. Yes. The redemption of such an obligation is subject ot reporting under section 6045 if a broker is otherwise involved. However, the reedemption of an interest coupon is considered a window transaction as provided in A-42 of § 35a.9999-l, so the payee is not required to certify the correctness of the taxpayer identification number.

      Foreign Transactions

      Q-31. What representations must a person make, on a certificate signed under penalties of perjury, to establish that the is an exempt foreign person under § 1.6045-l(g)(l) of the Income Tax Regulations and, consequently, that the gross proceeds of his broker transactions are not section 6045 reportable payments which may be subject to backup withholding?
      A-31. In order to be treated as an exempt foreign person under § 1.6045-l(g)(l) of the Income Tax Regulations with respect to transactions effected by a broker during a calendar year, a customer will only be required to certify to the broker the following: (1) That the foreign person is neither a citizen nor a resident of the United States, (2) that the foreign person has not been, and at the time the statement is furnished reasonably expects not to be, present, in the United States for a period aggregating 183 or more days during the calendar year, and (3} that the foreign person is not, and at the time the statement is furnished reasonably expects not to be, engaged in a United States trade or business with respect to which any gain derived from transactions effected by the "broker during that calendar year is effectively connected. In lieu of making the certifications in (2) or (3) of the preceding sentence, the person may instead certify that he is a beneficiary of an income tax treaty to which the United States is a party and pursuant to which gains from his broker transactions are exempt from Federal income taxation. A person may make this latter certification only if all conditions to the exemption provided by the treaty are actually satisfied.
      In accordance with the foregoing, the Service will amend § 1.6045-l(g) of the Income Tax Regulations to indicate that a foreign person need make no express representations to a broker concerning the application of section 877 or section 6013 (g) or (h) (although a person with respect to whom a section 6013 (g) or (h) election is in effect may not make the representation in (1) above that he is not a resident of the United States). These amendments will apply with respect to substitute forms prepared by the broker, as well as to the Form W-8 (which is being developed by the Service for use under the requirements both of § 1.6049-5(b)(2)(iv) and § 1.6045-l(g)(l) of the Income Tax Regulations). Subject to A-32, all other provisions of § 1.6045-l(g) of the Income Tax Regulations will remain in effect.
      Q-32. Must a foreign office of a United States broker obtain the statement described in § 1.6045-l(g)(l) of the Income Tax Regulations and A-31 from a foreign person having an account at that office in order to treat such person as an exempt foreign person under § 1.6045-l(g)(l) of the Income Tax Regulations?
      A-32. As currently provided in § 1.6045-l(g)(l) of the Income Tax Regulations, a foreign office of a United States broker may treat a customer as an exempt foreign person if it receives a certificate, signed under penalties of perjury, in accordance with § 1.6045-l(g)(l) of the Income Tax Regulations. However, the Service will also permit a person to be treated as an exempt foreign person with respect to transactions effected on his behalf by a foreign office of the broker if either of the following conditions is satisfied: (1) During the calendar year in which such transactions are effected, the broker withholds tax on any arjiount, including interest and dividends, paid to such person under subchapter A of chapter 3 of the Code in accordance with the provisions of chapter 3; or (2) the broker, in accordance with § 1.1441-6 (b) or (c) of the Income Tax Regulations, has received from such person a Form 1001 (Ownership, Exemption or Reduced Rate Certificate) or special variation thereof that is in effect with respect to any amounts (including interest) that are or may be paid to such person during the calendar year in which the transactions are effected. These alternatives to obtaining the certificate described in § 1.6045-l(g)(l) of the Income Tax Regulations only apply, however, if payments the broker makes with respect to transactions effected on behalf of 6uch person are made only outside the United States and if such person has no account with a branch of the broker in the United States. Section 1.6045-l(g) of the Income Tax Regulations will be amended to reflect this modification.
      Q-33. With respect to payments of United States source original issue discount on obligations having maturities of six months or less from the date of original issue, must a payor obtain the statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations from a payee who is neither a citizen nor a resident of the United States in order to avoid section 6049 information reporting and the possible application of backup withholding?
      A-33. Generally, when making payments of United States source interest or original issue discount to a payee who is a foreign person, the payor need not obtain the certificate described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations since the payor usually either withholds tax on the amounts paid in accordance with subchapter A of chapter 3 of the Code or obtains a Form 1001 from the payee with respect to such payments. See § 1.6049-5(b)(2)(i) and (ii) of the Income Tax Regulations. However, as original issue discount on obligations having maturities of six months or less from the date of original issue is not subject to United States tax when paid to a foreign person, there is neither withholding under subchapter A of chapter 3 of the Code nor the receipt of a Form 1001 with respect to such amount. In order to treat original issue discount on obligations having maturities of six months or less from the date of original issue the same under § 1.6049-5(b)(2) of the Income Tax Regulations, as interest and original issue discount on other obligations, the Service will allow a payee who is a foreign person to substitute a Form 1001 for the statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations with respect to original issue discount on obligations having maturities of six months or less from the date of original issue. Despite the substitution of the Form 1001 for the Form W-8 or substitute form prepared by the payor, all other procedures of § 1.6049-5(b)(2)(iv) of the Income Tax Regulations will apply.
      Section § 1.6049~5(b)(2) of the Income Tax Regulations will be amended to reflect the modifications made by this A-33.
      Q-34. Are payments of foreign source interest made on deposits outside the United States by a foreign branch of a United States bank reportable payments that may be subject to backup withholding?
      A-34. As provided in § 1.6049-5(b)(l)(ix) of the Income Tax Regulations, such payments are not required to be reported under section 6049. However, except to the extent such payments are less than $600 in a taxable year or are made to persons who are neither citizens nor residents of the United States, they are subject to information reporting under section 6041(a).
      For purposes of section 6O41(a). a foreign branch of a United States bank may treat a person as being neither a citizen nor a resident of the United States if the bank has evidence in its records to such effect (provided it does not have actual knowledge that the evidence is false). Such evidence may include a written indication from the payee (e.g., appearing on an account application form) that the payee is neither a citizen nor a resident of United States or an affidavit from an employee of the United States bank stating that the employee knows that, or that the payee has represented orally that, he is neither a citizen nor a resident of the United States. The mere fact, however, that the payee has provided an address outside the United States is insufficient evidence to establish for this purpose that the payee is neither a citizen nor a resident of the United States.
      Foreign source interest payments made on deposits outside the United States by foreign branches of United States banks to United States persons, although reportable payments under section 6041(a), will not be subject to backup withholding beginning January 1, 1984. However, the issue of whether backup withholding should be applied with respect to such payments is presently under further consideration. If backup withholding is subsequently determined to be appropriate, such will be provided in future regulations. Backup withholding, in that case, would apply no earlier than July 1, 1984, and would apply on a prospective basis only. Payments of interest on deposits of United States persons with foreign branches of foreign banks similarly will not be subject to backup withholding beginning January 1, 1984.
      Q-35. In the case of a payment to joint payees, must a payor obtain the statement described in § 1.6049-5(b)(2)(iv) of the Income Tax Regulations (or other verification of foreign status described in § 1.6049-5(b)(2) (ii) or (iii) of the Income Tax Regulations) with respect to each payee in order for such payment to be exempt from information reporting under § 1.6049-5(b)(l)(vi) of the Income Tax Regulations and from the possible application of backup withholding?
      A-35. Yes. In order for a payment to be exempt from information reporting under § 1.6049-5(b)(l)(vi) of the Income Tax Regulations (and in order not to constitute a reportable payment to which backup withholding may apply), the payor must ascertain in accordance with the provisions of § 1.6049-5(b)(2) of the Income Tax Regulations that each payee is a foreign person. A broker similarly must verify the independent status of each person on a joint account as an exempt foreign person in accordance with the provisions of § 1.6O45-l(g)(l) of the Income Tax Regulations, and of A-31 and A-32, in order to exempt transactions effected on behalf of such account from section 6045 information reporting and from the possible application of backup withholding.
      If the first payee named on the account, but not every joint payee, provides the verification of foreign status referred to in this A-35, backup withholding shall commence unless any one of the joint payees has provided a taxpayer identification number to the payor in the manner otherwise required in §§ 35a.9999-l and 35a.9999-2. This is contrary to the general rule of section 3406(h)(3), which would require backup withholding to commence unless a taxpayer identification number is obtained from the first payee listed in the payment.
      Q-36. In order to avoid information reporting under section 6042 and the possible application of backup withholding, must a payor cf United States source dividends to a person having an address outside the United States obtain from such person a statement, signed under penalties of perjury, that the person is neither a citizen nor a resident of the United States?
      A-36. No. The regulations under section 60-42 exempt from information reporting any United States source dividends that are subject to withholding under section 1441 or section 1442 or that would be subject to such withholding either but for the provisions of a treaty or but for the fact of the application of § 1.1441-4 (a) or (f) of the Income Tax Regulations (relating to income effectively connected with a United States trade or business). See § 1.6042-3(b)(2) of the Income Tax Regulations. The regulations under section 1441 indicate that, absent definite knowledge of the status of a payee, a payor of United States source dividends may determine whether withholding is required under section 1441 (absent the receipt of a Form 4224 evidencing effectively connected income) or whether a payee is entitled to exemption from such withholding under the applicable provisions of a treaty by reference to the address of the payee. See § 1.1441-3(b)(3) of the Income Tax Regulations. Therefore, provided a payor does not have definite knowledge that a payee is a United States person, the payor may treat payments of United States source dividends to a payee with a foreign address as exempt from information reporting under section 6042 and from the possible application of backup withholding. (Note, however, that the use of the address method for purposes of section 1441 is under reconsideration in accordance with the provisions of section 342 of the Tax Equity and Fiscal Responsibility Act of 1982. Future elimination of such a method could impact prospectively on the requirement of backup withholding with respect to dividends).
      Payments of dividends to United States persons by a foreign corporation which are not exempt from information reporting under § 1.6042-3(b)(l) (relating to payments by a foreign corporation that is not engaged in business in the United States and that does not have an office or place of business or a fiscal or paying agent in the United States) will nevertheless not be subjact to backup withholding beginning January 1, 1934. However, the issue of whether backup withholding should be applied with respect to such payments is presently under further consideration. If backup withholding is determined to be appropriate, such will be provided in future regulations. Backup withholding, in that case, would apply no earlier than July 1, 1984, and would apply on a prospective basis only.
      Q-37. With respect to a payment of interest that would be subject to information reporting under section 6049 but for the fact that it is made outside the United States, how is the place of payment to be determined?
      A-37. For purposes of the reporting requirements of section 6049 and backup withholding, the place of payment of interest is considered to be the place where the payor or middleman completes the acts necessary to effect payment. The fact that payment is made from an account with a United States office of a United States or foreign bank by means of a draft drawn on the bank or by a wire or other electronic transfer from an account with the United States office of the bank is not alone determinative of the place of payment. Similarly, the fact that payment is made by means of a transfer into an account of the payee with a United States office of a United States or foreign bank, whether by means of a wire or other electronic transfer, is not determinative of the place of payment, unless such office is expressly authorized by the payee to act as agent for collection of the interest or unless the records of such office otherwise reasonably evidence the nature of the funds transferred as interest and the amount of such interest.

      Subject to the foregoing provisions concerning the receipt of wire and other electronic transfers, a bank or similar financial institution is generally considered to complete the acts necessary to effect payment of interest on its deposits at the branch or office at which it credits the interest to the account of the payee or at which payment is made in cash. However, in no event shall interest be considered to be paid for purposes of section 6049 at a branch or office of the financial institution unless all the following conditions are met: (1) The branch or office is a permanent place of business which is regularly maintained, occupied, and used to carry on a banking or similar financial business, (2) the business is conducted by at least one employee of the branch or office who is regularly in attendance at such place of business during normal business hours, and (3) the branch or office receives deposits of funds from the public and in addition also engages in one or more of the other activities listed in 5 1.864-4(c)(5)(i) of the Income Tax Regulations.

      In the case of a coupon bend (including a certificate cf deposit with detachable interest coupons), the acts necessary to effect payment of interest are considered to be completed within the United States either if: (1) A coupon is presented to a payor or middleman within the United States (regardless of whether the funds paid are credited to an account of the payee maintained outside the United States); or (2) the coupon is presented at an office of a payor or middleman outside the United States but the interest on the coupon is credited to an account of the payee maintained with another office of the payor or middleman within the United States. The application of the provisions of this A-37 will be illustrated by examples to be published in future regulations.

      Refund of Erroneously Withheld Amounts

      Q-38. What action should a payor take if the payor erroneously imposes backup withholding?
      A-38. If a payor, through its own error, withholds tax or withholds more than the proper amount of the tax, the payor may refund the amount erroneously withheld as provided in section 6413 and A-39. A payor shall be considered to have withheld erroneously only if the amount is withheld because of an error by the payor (e.g., an error in "flagging" or identifying an account that is subject to backup withholding). If the payor requires a payee described in § 31.352(c)-(l) (b) through (p) of the Employment Taxes and Collection of Income Tax at Source Regulations (e.g., a corporation) to certify as to its status as exempt from backup withholding, the payee fails to make the required certification, and the payor subsequently withholds the tax from a payment to such payee, the payor may, in its discretion, treat the amount withheld as an amount erroneously withheld and refund it to the payee. The result is the same if the payor does not require such a payee to certify as to its status and the payor withholds.
      If a payor withholds from a payee after the payee provides a taxpayer identification number or required certification to the payor but before the payor has processed the number or required certification (i.e., prior to the time that the payor is treated as having received the number or certification under A-17 of § 35a.9999-2), the payor may, in its discretion, treat the amount withheld as an amount erroneously withheld and refund it to the payee. If a payor withholds, however, because the payor has not received a taxpayer identification number or required certification and the payee subsequently provides a taxpayer identification number or the required certification to the payor, the payor may not refund the tax to the payee because the payor properly imposed backup withholding. The amount withheld is a credit against tax then the payee may take into account in computing estimated tax payments and may claim on the payee's income tax return.
      Q-39. In what manner should a payor treat erroneously withheld tax?
      A-39. If a payor withholds from a payee in error or withholds more than the correct amount of tax, the payor may refund the amount improperly withheld to the payee so long as the refund is made prior to the end of the calendar year and prior to the time the payor furnishes a Form 1099 to the payee with respect to the payment for which the improper withholding occurred. If the amount of the improper withholding is refunded to the payee, the payor shall keep as part of its records a receipt showing the date and amount of refund. For this purpose, a cancelled check or an entry in a statement, a copy of which is provided to the payee by the payor, will suffice for a receipt showing the refund of tax improperly withheld provided that the check or statement contains a specific notation that it is a refund of tax improperly withheld.
      If the payor has not deposited the amount of the tax prior to the time that the refund is made to the payee, the payor shall not deposit the amount of the tax improperly withheld. If the amount of the improperly withheld tax has been deposited prior to the time that the refund is made to the payee, the payor may adjust any subsequent deposit of tax collected under chapter 24 of the code which the payor is required to make in the amount of the tax which has been refunded to the payee. A payor shall not report on a Form 1099 as tax withheld any amount of tax which the payor has refunded to a payee.
      Q-40. If a "middleman" payor of reportable interest or dividends (e.g., a broker holding stock in "street name") receives a payment a portion of which was improperly withheld upon prior to payment to the "middleman" payor, what action may the "middleman" take?
      A-40. A middleman who receives a payment (referred to as a "receiving payor") from which tax has been improperly withheld may seek a refund of the tax withheld by the payor from whom the receiving payor received the payment (referred to as the "upstream payor") or, alternatively may obtain a refund of the tax by claiming a credit for the amount of tax withheld by the upstream payor against the deposit of any tax collected under chapter 24 of the Code which the receiving payor is required to withhold and deposit. The receiving payor shall make or credit the gross amount of the payment (including the tax withheld) to its payee as though it had received the gross amount of the payment from the upstream payor and shall withhold the tax if any of the conditions for imposing backup withholding exist with respect to its payee.

      When Backup Withholding Stops

      Q-41. When may a payor stop withholding?
      A-41. If a payee is subject to backup withholding because the payee failed to furnish a taxpayer identification number in the manner required, the payor is required to withhold until a taxpayer identification number is received from the payee in the manner required. Once the payor receives the payee's taxpayer identification number in the manner required, the payor must stop withholding. See A-17 of § 35a.9999-2 for determining when a payor is treated as having received a taxpayer identification number. The same rule applies with respect to a payee certification failure under section 3406(a)(l)(D). If more than one condition applies for imposing backup withholding, a payor is required to withhold until all of the conditions for imposing backup withholding cease to apply.

      Confidentiality

      Q-42. What use may a payor make of information obtained under the backup withholding rules?
      A-42. A payor may use information obtained under the backup withholding rules (including any information with respect to any payee certification failure other than failure to certify the payee's taxpayer identification number) only for the purposes of complying with the backup withholding and information reporting requirements, or to the extent otherwise permitted by the Code. Any other use of this information may subject the payor to civil damages under section 7431 of at least $1,000 plus the cost of the action.
      Q-43. May a payor impose a surcharge to cover the cost of backup withholding on an account?
      A-43. No. If the payor imposes a surcharge on such an account, the payor is liable to the payee under section 7431 for an unauthorized use of information obtained by the payor under section 3406.
      Q-44. If a payor imposes backup withholding on a payee, may the payor use this information in determining whether to extend credit to the payee?
      A-44. No. If the payor uses this information in making its decision, the payor is liable to the payee under section 7431 for an unauthorized use of information obtained pursuant to section 3406.
      Q-45. If a payor is notified to begin withholding on payments made with respect to a payee and the payor provides notice to the payee of the withholding, has the payor made an unauthorized disclosure under section 7431?
      A-45. No. If, for example, a payor receives a notice from a broker of the requirement to withhold with respect to a payee and the payor, pursuant to A-39 of § 35a.9999-l and A-18 of § 35a.9999-2, provides notice to the payee of such withholding, the payor has no liability to the payee under section 7431.

      Miscellaneous

      Q-46. If a payor withholds on any payment and the payment is less than the minimum amount for which an information return is required, is the payor required to make an information return and furnish a statement to the recipient?
      A-46. Yes. Whenever the payor imposes backup withholding, the payor is required to make an information return regardless of the amount of the payment. The information return shall show the payee's name, address, and taxpayer identification number, the amount of the payment (or aggregate payments to the payee during the calendar year), and the amount of tax withheld. The information return must be provided to the Service no later than February 28 of the year following the calendar year of payment. In addition, the payor is required to furnish a statement to the payee showing the same information, including the amount of tax withheld no later than January 31 of the year following the calendar year of payment.
      Q-47. Does backup withholding apply to partnerships?
      A-47. Backup withholding generally will apply to a payment to a partnership if the partnership does not provide its correct employer identification number to the payor in the manner required. In addition, the partnership will be required to withhold on all reportable payments that a partnership makes to a payee who is subject to backup withholding. Distributions by a partnership to its partners of their distributive share of partnership income, however, are not reportable payments, so that backup withholding does not apply to such distributions, except to the extent such distributions are reportable under section 6045.
      Q-48. May payors require that a separate Form W-9 be filed for each account or instrument held by a payee?
      A-48. Yes. See A-29 of § 35a.9999-l. However, a payor at its option, may require a payee to file only one Form W-9 for all accounts or instruments of the payee. For example, a bank may permit a payee to file one Form W-9 for all savings, interest-bearing checking, or other accounts the payee has with the bank. In addition, a payee of a mutual fund that has a common investment advisor or common principal underwriter with other mutual funds will be permitted, in the discretion of the mutual fund, to provide one Form W-9 with respect to shares acquired or owned in any of the funds.
      Q-49. Do the general rules for deposit, payment, penalties, and reporting of taxes withheld from wages apply to backup withholding?
      A-A9. Yes. Section 3406(h)(l) provides generally that payments subject to backup withholding shall be treated as wages. Thus, the general procedures for withholding, deposit, payment, and reporting of Federal tax withheld shall apply to payments subject to backup withholding. For example, section 6205 provides that an employer (payor) who makes an undercollection of income tax required to be withheld shall correct such error for the return period in which the undercollection is ascertained. Accordingly, section 6205 requires the employer (payor) to withhold amounts from subsequent payments to the employee (payee) that should have been withheld from prior payments, whether or not such subsequent payments are subject to withholding. Thus, a payor who does not impose backup withholding when required must withhold from subsequent payment to the payee even though the conditions for imposing backup withholding may not exist at the time the subsequent payment is made to the payee.
      Q-50. If a payor uses a single employer identification number to report the tax withheld by all its subsidiaries, must all tax withheld with respect to reportable payments by its subsidiaries be aggregated for purposes of determining when tax withheld by them with respect to reportable payments must be deposited under section 6302?
      A-50. Yes. All tax withheld under a single employer identification number with respect to reportable payments must be aggregated for purposes of determining when such tax must be deposited.
      Q-51. In order for a payor of a reportable interest or dividend payment to be considered to have exercised due diligence in furnishing the correct taxpayer identification number of a payee with respect to an account opened or an instrument acquired after December 31, 1933, what actions must the payor take?
      A-51. In general, the payor of an account or instrument that is not a pre-1984 account (as defined in A-34 of § 35a.9999-l and A-19) must use a taxpayer identification number provided by the payee under penalties of perjury to satisfy the due diligence requirement. Therefore, if, after 1983, a payor permits a payee to open an account without providing proper certification that the taxpayer identification number furnished is correct, and a Form 1099 is filed by the payor with a missing or incorrect number, the payor will be liable for the $50 penalty.
      A payor also will be considered to have exercised due diligence with respect to a readily tradable instrument that is not a pre-1984 account if the payor (1) uses a taxpayer identification number furnished by a broker or (2) records on its books a transfer to which the payor was not a party. In addition, a payor with respect to an account or instrument that is not a pre-1984 account will be considered to have exercised due diligence if the payee has complied with the requirements of A-18 of § 35a.99.99-2 (exception for a payee who is waiting for receipt of a taxpayer identification number), provided that the payor imposes backup withholding if the payee fails to provide a taxpayer identification number in the manner and within the period required by A-18 of § 35a.9999-2.
      When a broker notifies the payor that a payee failed to cerfity or furnish a taxpayer identification number, the payor will be considered to have exercised due diligence if the payor: (1) Imposes backup withholding if the payee did not certify his taxpayer identification number to the payor, (2) provides notice to the payee as provided in A-39 of § 35a.9999-l and A-18 of § 35a.9999-2, and (3) encloses a postage paid reply envelope.
      In addition, to have exercised due diligence, a payor mu3t use the same care in processing a certified taxpayer identification number provided by a payee that a reasonably prudent payor would use in the course of the payor's business in handling account information, such as account numbers and account balances. With respect to window transactions (a3 defined in A-42 of § 35a.9999-l and A-9 of § 35a .9999-2), a payor shall be considered to have exercised due diligence only if it uses the taxpayer identification number provided by the payee. If no number is provided, the payor will not be considered to have exercised due diligence.
      Q-52. Does the rule of A-5 of § 35a.9999-2 which allows a payor to deliver the mailings described in A-5 and A-6 of § 35a.9999-l in person or by intra-office mail, apply with respect to mailings requesting a penalties of perjury statement from foreign payees described in A-52 and A-55 of § 35a.9999-l?
      A-52. Yes. A payor or broker may deliver the mailings requesting the penalties of perjury statement from foreign payees described in A-52 and A-55 of § 35a.9999-1 provided the mailings are delivered by the same method used by the payor or broker in sending account activity and balance information and other correspondence to the payee.

      §35a.9999-2 [Amended]

      Par. 2. In FR Doc. 83-31748, found at page 53111 (Nov. 25, 1983) the second sentence of A-21 of § 35a.9999-2 is amended to provide as follows: Backup withholding also is not required with respect to any other reportable payment made to an exempt recipient described in § 31.3452(c)-l (b) through (p) of the Employment Taxes and Collection of Income Tax at Source Regulations, except in the case of (1) payments with respect to barter exchange transactions reportable under section 6045, and (2) payments reportable under sections 6041, 6041A, and 6050A.

      There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

      This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c), (e), (g), (h), and (i), section 6041, section 6041 A(a), section 6042(a), Secton 6044(a), section 6045, section 6049 (a], (b). and (d), section 6103(q), section 6109, section 6302(c), section 6676, and section 7805 of the Internal Revenue Code of 1954 (97 Stat. 371, 372, 373, 376, 377, 378, 379, 26 U.S.C. 3406 (a), (b), (c), (e), (g), (h), and (i); 68A Stat. 745, 26 U.S.C. 6041; 96 Stat. 601, 26 U.S.C. 6041A(a); 96 Stat. 587, 26 U.S.C. 6042(a); 96 Stat. 587, 26 U.S.C. 6044(a); 96 Stat. 600, 26 U.S.C. 6045; 96 Stat. 592, 594, 26 U.S.C. 6049 (a), (b), and (d); 90 Stat. 1685, 26 U.S.C. 6103(q); 75 Stat. 828, 26 U.S.C. 6109; 68A Stat. 775, 26 U.S.C. 6302(c); 68A Stat. 917, 26 U.S.C. 7805) and in sections 104,105, and 108 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371, 380, and 383).

      Roscoe L. Egger, Jr.,
      Commissioner of Internal Revenue.

      Approved: December 16, 1983.

      John E. Chapoton,
      Assistant Secretary of the Treasury.

      [FR Doc 83-33848 Filed 12-16-83: 4:53 pm]

      BILLING CODE 4830-01-M

      DEPARTMENT OF THE TREASURY

      Internal Revenue Service

      26 CFR Part 35a

      [T.D. 7933]

      Temporary Employment Tax Regulations Under the Interest and Dividend Tax Compliance Act of 1983; Backup Withholding

      AGENCY: Internal Revenue Service, Treasury.

      ACTION: Temporary regulations.

      SUMMARY: This document supplements the temporary regulations relating to backup withholding. Changes to the applicable tax law were made by the Interest and Dividend Tax Compliance Act of 1983 (Pub. L. 98-67, 97 Stat. 369). These regulations affect brokers with respect to reportable gross proceeds and provide them with the guidance necessary to comply with the law.

      DATE: The temporary regulations are effective for payments made after December 31, 1983.

      FOR FURTHER INFORMATION CONTACT: Diane Kroupa of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, 1111 Constitution Avenue, NW., Washington, D.C. 20224, 202-566-3590, not a toll-free call.

      SUPPLEMENTARY INFORMATION:

      Background

      On October 4, 1983, the Federal Register published Temporary Employment Tax Regulations under the Interest and Dividend Tax Compliance Act of 1983 (26 CFR Part 35a) under sections 3406 and 6676 of the Internal Revenue Code of 1954 (26 CFR Part 35a.9999-l; 48 FR 45362). Additional temporary regulations were published in the Federal Register on November 25, 1983 (26 CFR Part 35a.9999-2; 48 FR 53104) and on December 20,19S3 (26 CFR Part 35a.9999-3; 48 FR 56330). Those regulations were published to conform the regulations to the statutory changes enacted by the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369). These regulations supplement 26 CFR Part 35a.9999-3 (December 20, 1983). by adding Question (Q) and A-28B.

      These temporary regulations, presented in question and answer format, are intended to provide guidelines upon which brokers may rely in order to resolve questions specifically set forth herein. However, no inference should be drawn regarding issues not raised herein or reasons certain questions, and not others, are included in these regulations.

      Explanation of Provisions

      These regulations provide transition rules applicable to backup withholding en gross proceeds reportable by brokers under section 6045. In summary, the regulations provide that, for purposes of backup withholding on gross proceeds, the written certification requirement for post-1983 accounts may be delayed, at the broker's option, until March 31, 1984. Thus, a customer who opens an account after December 31, 1983, and who consummates a sale prior to April 1, 1984, will not be subject to backup withholding, provided that he furnishes a taxpayer identification number to the broker prior to the sale.

      In addition, until March 31, 1984, a broker may give customers with pre-1984 accounts, who have not furnished taxpayer identification numbers, 30 days after a sale to provide their numbers, without being subject to backup withholding. Until such a customer provides a number, however, the customer is not permitted to withdraw the cash proceeds from the account. If no number is furnished within 30 days after the sale, the broker must withhold 20 percent of the reportable gross proceeds on the 31st day.

      Nonapplicabiiity of Executive Order 12291

      The Treasury Department has determined that these temporary regulations are not subject to review under Executive Order 12291 or the Treasury and OMB implementation of the Order dated April 29, 1983.

      Regulatory Flexibility Act

      No general notice of proposed rulemaking is required by 5 U.S.C. 553(b) for temporary regulations. Accordingly, the Regulatory Flexibility Act does not apply and no Regulatory Flexibility Analysis is required for this rule.

      Drafting Information

      The principal author of these regulations is Diane Kroupa of the Legislation and Regulations Division of the Office of the Chief Counsel, Internal Revenue Service. Personnel from other offices of the Internal Revenue Service and the Treasury Department participated, however, in developing the regulations on matters of both substance and style.

      List of Subjects in 26 CFR Part 35a

      Employment taxes, Income taxes, Backup withholding. Interest and Dividend Tax Compliance Act of 1983.

      Adoption of Amendments to the Regulations

      Accordingly, 26 CFR Part 35a is amended as follows:

      PART 35a—[AMENDED]

      Section 35a.9999-3 is amended by adding new Question Q-28B and Answer A-283 immediately after A-28A of that section. These added provisions read as follows:

      § 35a.9999-3 Questions and answers concerning backup withholding.

      * * * * *

      Q-28B. Will transition rules apply to backup withholding on gross proceeds reportable by brokers under section 6045?
      A-23B. Yes. The following transition rules will apply until April 1, 1984. First, for purposes of backup withholding on gross proceeds reportable by brokers, the penalties of perjury certification required by A-12 of § 35a.9999-2 (for post-1983 accounts) may be waived, at the broker's option, until April 1, 1984. A customer who opens an account after December 31, 1983, and who consummates a sale prior to April 1, 1984, will not be subject to backup withholding, provided that the customer furnishes a taxpayer identification number to the broker prior to the sale. The gross proceeds from sales made through post-1983 accounts after March 31, 1984, however, will be subject to backup withholding if the customer does not provide a taxpayer identification number certified under penalties of perjury. See A-28A for special rules applicable when a sale is made pursuant to a telephone instruction.

      Second, until April 1, 1984, the gross proceeds from a sale made through a pre-1984 account, by a customer who has not provided a taxpayer identification number, will not.be subject to backup withholding, at the broker's option, provided that (1) the customer furnishes his number to the broker within 30 days after the date of the sale, and (2) the customer does not withdraw the proceeds of the sale prior to the time his taxpayer identification number is furnished to the broker (or backup withholding is applied). For purposes of the preceding sentence, an investment of the cash proceeds shall be considered a withdrawal by the customer; however, investment of the proceeds in other property shall be permitted if, at all times during the 30-day period, at least 20 percent of all gross proceeds reportable under section 6045 are held in cash within the customer's account by the broker. If the customer does not furnish his taxpayer identification number within 30 days after the date of sale, the broker must withhold 20 percent of all reportable gross proceeds on the 31st day after the date of the sale.

      If, with respect to forward contracts, regulated futures contracts, security short sales, or issuer payment of debt securities, the broker applies backup withholding on a date other than the sale date (see A-23 through A-25 and A-27], the rules of this A-28B shall apply as if any date on which the broker determines whether backup withholding applies were a sale date.

      * * * * *

      There is a need for immediate guidance with respect to the provisions contained in this Treasury decision. For this reason, it is found impracticable to issue it with notice and public procedure under subsection (b) of section 553 of Title 5 of the United States Code or subject to the effective date limitation of subsection (d) of that section.

      This Treasury decision is issued under the authority contained in section 3406 (a), (b), (c). (e), (g), (h), and (i) and section 6045 of the Internal Revenue Code of 1954 (97 Stat. 371, 372, 373, 376, 377. 378, 379, 26 U.S.C. 3406 (a), (b), (c), (e), (g). (h). and (i); 96 Stat. 600, 26 U.S.C. 6045) and in section 104 of the Interest and Dividend Tax Compliance Act of 1983 (97 Stat. 369, 371).

      Roscoe L. Egger, Jr.,
      Commissioner of Internal Revenue.

      Approved:
      Ronald A. Pearlman,
      Acting Assistant Secretary of the Treasury.

      December 29, 1983.

      [FR Doc. 83-34234 Filed 12-29-83: 4:48 pm]

      BILLING CODE 4630-01-M


      * Backup withholding need not be imposed until March 31, 1984 (See discussion of January 3, 1984, ruling which follows).

    • 84-5 Jay W. Kaufmann & Co. Ill Broadway New York, New York

      TO: All NASD Members

      ATTN: Operations Officer, Cashier, Fail-Control Department

      On January 23, 1984, the United States District Court for the Southern District of New York appointed a SIPC Trustee for the above captioned firm.

      Members may use the "immediate close-out" procedures as provided in Section 59(i) of the NASD's Uniform Practice Code to close out open OTC contracts. Also, MSRB Rule G-12 (h)(iv) provides that members may use the above procedures to close out transactions in municipal securities.

      Questions regarding the firm should be directed to:

      SIPC Trustee

      Irving H. Picard, Esquire
      Moses & Singer
      Time & Life Building
      1271 Avenue of the Americas
      New York, New York 10020
      Telephone: (212) 246-3700

      * * * *

    • 84-4 National Market System Grows to 789 Securities With 50 Additions on February 14

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      On Tuesday, February 14, the National Market System will include 789 securities as 50 more NASDAQ securities are phased into the System. (A week earlier, 12 mandatory designations will join NMS).

      These 50 securities meet the SEC's voluntary designation criteria, which include six-month average trading volume of 100,000 shares a month and a minimum bid price of $5.

      The 50 securities scheduled for NMS trading on February 14 are:

      SYMBOL

      COMPANY

      LOCATION

      ARON

      Aaron Rents, Inc.

      Atlanta, GA

      AWAL

      America West Airlines, Inc.

      Tempe, AZ

      ANDY

      Andros Analyzers Incorporated

      Berkeley, CA

      AVTR

      Avatar Holdings Inc.

      Coral Gables, FL

      BNHI

      Bancorp Hawaii, Inc.

      Honolulu, HI

      BAMI

      Basic American Medical, Inc.

      Indianapolis, IN

      BMPI

      Biosearch Medical Products Inc.

      Somerville, NJ

      CSPI

      CSP Inc.

      Billerica, MA

      CLNY

      Calny Incorporated

      San Mateo, CA

      CTBC

      Centerre Bancorporation

      St. Louis, MO

      CNTO

      Centocor, Inc.

      Malvern, PA

      CRNR

      Chronar Corporation

      Trenton, NJ

      CTAS

      Cintas Corporation

      Cincinnati, OH

      CLRK

      Clark (J. L.) Manufacturing Co.

      Rockford, IL

      CAUT

      Computer Automation, Inc.

      Boulder, CO

      CPRD

      Computer Products, Inc.

      Ft. Lauderdale, FL

      CORC

      Corcom, Inc.

      Libertyville, IL

      CRWN

      Crown Books Corporation

      Landover, MD

      DRUGA

      Dart Drug Corporation (Cl A)

      Landover, MD

      DUNK

      Dunkin1 Donuts Incorporated

      Randolph, MA

      FICR

      Fideleor, Inc

      Rosemont, PA

      FJNC

      First Jersey National Corporation

      Jersey City, NJ

      GTSC

      GTS Corporation

      Houston, TX

      GENL

      Genetic Laboratories, Inc.

      St. Paul, MN

      GOTT

      Gott Corporation

      Winfield, KS

      IPLSA

      IPL Systems, Inc. (Cl A)

      Waltham, MA

      IRIC

      Information Resources, Inc.

      Chicago, IL

      IGAM

      International Game Technology

      Reno, NV

      LAZB

      La-Z-Boy Chair Company

      Monroe, MI

      LANC

      Lancaster Colony Corporation

      Columbus, OH

      MPSG

      MPSI Systems Inc.

      Tulsa, OK

      MSCI

      MacNeal-Schwendler Corporation (The)

      Los Angeles, CA

      MTRC

      Mercantile Bancorporation Inc.

      St. Louis, MO

      MIDW

      Midwestern Companies, Inc. (The)

      Joplin, MO

      MOKE

      Morgan, Keegan & Company, Inc.

      Memphis, TN

      NOXLB

      NoxeU Corporation (Cl B)

      Baltimore, MD

      PLEY

      Pauley Petroleum Inc.

      Los Angeles, CA

      PICC

      Piccadilly Cafeterias, Inc.

      Baton Rouge, LA

      SSFT

      Scientific Software Corporation

      Denver, CO

      SMLS

      SciMed Life Systems, Inc.

      Minneapolis, MN

      SEME

      Semicon, Inc.

      Burlington, MA

      SHEL

      Sheldahl, Inc.

      Northfield, MN

      SKIP

      Skipper's, Inc.

      Bellevue, WA

      SOCI

      Society Corporation

      Cleveland, OH

      SOFT

      SofTech, Inc.

      Waltham, MA

      STRW

      Strawbridge & Clothier

      Philadelphia, PA

      SYST

      Systematics, Inc.

      Little Rock, AR

      TLCI

      Tender Loving Care Health Care Services, Inc.

      Lake Success, NY

      UPCO

      United Presidential Corporation

      Kokomo, IN

      VAND

      Van Dusen Air, Inc.

      Minneapolis, MN

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-3 Temporary Relief from Certain Provisions of Rules 15e3-4 and 15c3-3 Dealing with Registered Municipal Securities is Extended until March 31, 1984, by SEC Staff

      TO: All NASD Members and Other Interested Persons

      On December 30, 1983, the staff of the SEC's Division of Market Regulation agreed to an extension of the temporary relief it previously granted under Rule 15e3-l (the "net capital" rule) and Rule 15c3-3 (the "customer protection" rule). This temporary relief, which was scheduled to expire on December 31, 1983, provides an extension of certain time periods specified in the rules before which capital deductions and/or other actions are required for transactions involving registered municipal securities. The determination to request an additional extension was based in part on the fact that since the requirement to issue bonds in registered form has only been in effect since July 1983, its full impact has not yet been realized. In requesting the extension, the Association agreed to continue to monitor the use of the temporary extensions and the impact of aged fails in the municipal marketplace. In light of this, the relief provided by the July no-action letter was extended by the Commission staff through March 31, 1984.

      A brief discussion of the background concerning the Association's request, and the sections of the rules affected as a result thereof, follows. Also, a copy of the letter issued by the Division of Market Regulation is reprinted as part of this Notice. For additional information, members should refer to Notice to Members 83-41, dated July 25, 1983.

      BACKGROUND

      In July 1983, the Association's Capital and Margin Committee, and others, expressed concern that the issuance of municipal securities in registered form, as required by the provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), would have a deleterious effect on the clearance and settlement of municipal securities transactions. As a result, the Association sought temporary relief for its members from certain increased capital and reserve requirements which would result from an increase in the number of fails related to registered municipal securities. This temporary interpretative relief was granted by the Commission staff effective through December 31, 1983.

      The SEC staff, as a condition for granting relief in this area, required the designated examining authority to secure data from each broker-dealer who took advantage of the temporary extension. In this regard, the Association requested members to submit data with its regular FOCUS Part I Report for each month in which the member relied on any of the extensions provided for in the no-action letter. The data collected thus far indicates that the number of fail items and corresponding contract values have increased significantly since July. This seems to reflect an increase in the amount of fails in the marketplace although no firm conclusions can be drawn due to the limited number of municipal broker-dealers submitting reports.

      While these figures do not reflect widespread use of the interpretative relief afforded by the Commission, the general consensus is that the full impact of the requirement to issue municipal bonds in registered form has not been realized and probably will not be realized until there are a significant number of registered bonds trading in the marketplace. Since the requirement for registration has only been in effect since July 1983, the impact of the new rule has been limited. However, as more and more registered issues are brought to the market, more pressure will be exerted on the municipal securities industry back-offices. It is anticipated that this will be even more apparent as the problems associated with record ownership transfer increase and collection of interest through a simple redemption of bearer coupons is replaced by the complexities of crediting interest to a beneficial holder of record.

      While the Association recognizes that the Municipal Securities Rulemaking Board (MSRB) has initiated steps to promote the efficient clearance and settlement of municipal securities transactions, it is anticipated that municipal securities broker-dealers, clearing agencies and depositories will need time to respond to these initiatives. In this regard, the MSRB has enacted recent rule changes relating to the comparison of interdealer trades, the acknowledgement and confirmation of customer trades through the facilities of a clearing agency, and mandatory book entry settlement for depository eligible securities. As a result, the number of physical deliveries of municipals and resultant fails will be reduced. However, in order to ease the transition to automated clearance, the MSRB has delayed the effective dates of these rule changes until August 1, 1984 (mandatory use of clearing agencies), and February 1, 1985 (mandatory book entry settlement).

      In light of the above findings and discussions, the Association petitioned the Commission to extend the relief applicable to registered municipal securities provided by its no-action letter issued in July.

      PERTINENT PROVISIONS OF THE NET CAPITAL AND CUSTOMER PROTECTION RULES

      SEC Rule 15c3-l

      The relief provided under the net capital rule for transactions in registered municipal securities is as follows:

      • Subparagraph (c)(2)(ix) provides for a deduction from net capital for those municipal fails to deliver which are outstanding for 21 business days or longer. This time period has been extended to 30 business days for transactions involving registered municipal securities.
      • Under subparagraph (c)(2)(iv)(B), an existing interpretation provides that broker-dealers must make appropriate deductions from net worth for deficits in cash accounts for C.O.D. transactions involving municipal securities 42 calendar days after trade date. This time period has been extended to 60 calendar days after trade date for transactions involving registered municipal securities.
      • Subparagraph (a)(8) permits a municipal securities broker's broker to compute its capital requirements in accordance with specified guidelines. In this regard, subparagraph (a)(8)(iv) requires such a broker to make a deduction from net worth equal to 1% of the market value of the underlying security for municipal securities fails to deliver which are outstanding for 21 business days or longer. This time period has been extended to 30 business days for fails to deliver involving registered municipal securities.

      SEC Rule 15c3-3

      The relief provided under Rule 15c3-3 for registered municipal securities fails to deliver is as follows:

      • In computing its reserve requirement, a broker-dealer is required to exclude from the debit side of the formula fails to deliver which are outstanding more than 30 calendar days. This time period has been extended to 45 calendar days for fails to deliver involving registered municipal securities.

      REPORTING REQUIREMENT

      During the extended period, the Association will continue to monitor the use of the interpretative relief and the impact of aged fails in the municipal marketplace and to report such findings to the Commission on a periodic basis.

      In this regard, an Association member for whom the NASD is the designated examining authority is requested to continue to submit the form, entitled "Supplemental Report - Relief from Operational Deductions for Aged Fails to Deliver in Registered Municipal Securities," to the Association along with its FOCUS Part I Report for each month in which the member relies on any of the extensions for aged fails permitted by the SEC's temporary no-action letter. This form (copy enclosed) must be submitted even if the member uses the interpretation in only one instance.

      Members are reminded that the relief provided by the no-action letter is available only for fails involving registered municipal securities and is effective only through March 31, 1984.

      Questions concerning this Notice may be directed to James M. Cangiano, Associate Director, Department of Policy Research, at (202) 728-8273. Questions regarding the filing and the completion of the Supplemental Report form should be referred to your local NASD District Office.

      Sincerely,

      John T. Wall
      Vice President
      Member and Market Services

      Attachments

      DIVISION OF MARKET REGULATION

      SECURITIES AND EXCHANGE COMMISSION

      WASHINGTON, D.C. 20549

      December 30, 1983

      Mr. John T. Wall
      Executive Vice President
      Member and Market Services
      National Association of Securities Dealers, Inc.
      1735 K Street, N.W.
      Washington, D.C 20006

      Dear Mr. Wall:

      Our letter dated July 7, 1983, to Gordon S. Macklin, President of the National Association of Securities Dealers, Inc. ("NASD"), took a no action position with respect to a temporary extension of certain time periods specified in the net capital and customer protection rules before capital deductions and/or other actions were required to be taken for transactions involving registered municipal securities. The temporary relief was scheduled to expire on December 31, 1983.

      The Division, as a condition for taking its position in this area, required the appropriate designated examining authority to secure data from each broker-dealer which took advantage of the temporary extension. In this regard, the NASD requested a member to submit data with its regular FOCUS Part I reports for each month in which the member relied on any of the extensions provided.

      You claim that while the available figures do not reflect widespread use of the temporary relief the general consensus among industry representatives is that the full impact of municipal bond registration has not been realized and probably will not be realized until there are a significant number of registered bonds trading in the marketplace. However, you believe as more registered issues are brought to the market, the problems associated with record ownership transfer will increase as will the collection of interest.

      You state that the NASD believes that the municipal securities industry led by the Municipal Securities Rulemaking Board ("MSRB") has initiated steps toward promoting efficient clearance and settlement of municipal securities transactions. You believe that recent rule changes of the MSRB relating to the comparison of interdealer trades, the acknowledgement and confirmation of customer trades through the facilities of a clearing agency, and mandatory book entry settlement for depository eligible securities will help facilitate the more efficient and timely settlement of municipal securities. As a result, the number of physical deliveries of municipal securities and resultant fails will be reduced.

      In order to ease the transition to automated clearance however, the MSRB has delayed the effective dates of these rule changes until August 1, 1984 (mandatory use of clearing agencies), and February 1, 1985 (mandatory book entry settlement). Given these circumstances, the NASD requests that the Commission extend to at least July 1, 1984, the relief provided by the July no-action letter.

      Should the Commission act favorably on this request, you state that the NASD will continue, during the extended period, to monitor the use of the temporary extensions and the impact of aged fails in the municipal marketplace and to report such findings to the Commission on a periodic basis.

      Finally, you state that the NASD believes that the data already gathered demonstrates that the interpretation has not been abused or used as an excuse in delaying the completion of securities transactions, and that the industry is as desirous as the Commission of eliminating inefficiencies and delays in the clearance and settlement of municipal transactions and is working diligently to achieve that goal.

      We agree that an extension of the temporary relief heretofore granted is appropriate because of the continued uncertainties in the registered municipal bond market and to ensure an orderly transition in the broker-dealers1 adapting to registered bonds. However, in view of the small number of fails which have exceeded the aging period, we believe that a 6 month period is not warranted. We believe that the period should be extended only to March 31, 1984, unless more substantial and convincing evidence of its need to the industry is submitted in support of any further request for an additional extension.

      We appreciate your efforts in bringing this matter to our attention and your cooperation in our attempts to understand the issue fully.

      Sincerely,

      Douglas Scarff
      Director

    • 84-2 12 Securities Mandated Into NMS on February 7, 1984

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      An additional 12 securities will join the 728 already designated to trade in the NASDAQ National Market System on Tuesday, February 7, 1984. These securities have met the mandatory NMS designation requirements which include an average trading volume of 600,000 shares a month and a minimum bid price of $10 on the last five business days of 1983.

      As required by SEC Rule HAa2-l all issues meeting the mandatory designation at the end of each quarter automatically are added to the National Market System within 45 days of the quarter ending date.

      The 12 securities joining NMS on February 7 are:

      SYMBOL

      COMPANY

      LOCATION

      CMPQ

      COMPAQ Computer Corporation

      Houston, TX

      ELSTF

      Elseint, Limited

      Haifa, Israel

      FDRI

      First Data Resources, Inc.

      Omaha, NE

      FFAZ

      First Federal Savings and Loan Association of Arizona

      Phoenix, AZ

      FOXM

      FoxMeyer Corporation

      Aurora, CO

      GRTA

      Great American Federal Savings Bank

      San Diego, CA

      HWRD

      Howard Savings Bank (The)

      Newark, NJ

      LOTS

      Lotus Development Corporation

      Cambridge, MA

      PHSI

      Pearle Health Services, Inc.

      DaUas, TX

      STRA

      Stratus Computer, Inc.

      Natick, MA

      VLIS

      VLI Corporation

      Irvine, CA

      WIDE

      Widcom, Inc.

      Campbell, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      Gordon S. Macklin
      President

    • 84-1 National Market System to Expand to 728 Issues January 17; and Year-End NASDAQ Market Highlights

      TO: All NASD Members and Level 2 and Level 3 Subscribers

      NASDAQ 1983 SHARE VOLUME REACHES 15.9 BILLION MARK; 88.7% INCREASE OVER RECORD 1982 8.4 BILLION

      1983 NASDAQ volume reached 15.9 billion shares, an all-time record and an 88.7% increase over 1982 volume. The 15.9 billion shares represented 74% of the NYSE's 1983 volume and 750% of that of the AMEX.

      On the last trading day of 1983, NASDAQ volume exceeded that of the NYSE floor by nearly seven million shares. This was the seventh time in 1983 that NASDAQ daily volume was higher than that of the NYSE. Average daily volume for 1983 was 62.9 million as compared to 33.3 million in 1982. A record for daily volume was set on June 16 when 95.2 million shares were traded.

      The NASDAQ Composite Index closed at 278.60, gaining 19.9% during 1983 and outperforming the NYSE Composite and the Standard and Poor's 500 indices. The six NASDAQ subindiees performed as follows:

       

      Closing Value

      Present Change Over 1982 Closing

      Industrial

      323.68

      +18.3

      Other Finance

      277.53

      +33.7

      Bank

      203.75

      +30.3

      Insurance

      257.83

      +13.8

      Utility

      269.39

      -5.9

      Transportation

      280.80

      +43.6

      The total number of securities on NASDAQ at year-end was 4,467, up 803 from 1982 and the number of companies reached 3,901, an increase of 637 from the year before.

      In December, NASDAQ share volume hit 1,327,253,000 shares for a daily average of 63,202,524 shares during 21 trading days. For the month, NASDAQ volume was 71.8% of the NYSE's 1,848,836,000 shares and 910.2% of the AMEX's 145,720,000 shares.

      NATIONAL MARKET SYSTEM TO EXPAND TO 728 ISSUES ON JANUARY 17

      An additional 50 issues will voluntarily join the NASDAQ National Market System on Tuesday, January 17, bringing the total number of NMS securities to 728. These 50 issues meet the SEC's criteria for voluntary designation, which include average monthly trading volume of 100,000 shares and a minimum bid price of $5.

      The 50 issues scheduled to join NMS on Tuesday, January 17, are:

      SYMBOL

      SECURITY

      LOCATION

      ABEV

      Allegheny Beverage Corporation

      Baltimore, MD

      ACIX

      American Carriers, Inc.

      Overland Park, KS

      ASAI

      Atlantic Southeast Airlines, Inc.

      College Parkway,

      AZTC

      Aztec Manufacturing Co.

      GA Crowley, TX

      BELL

      Bell National Corporation

      San Mateo, CA

      BHSL

      Beverly Hills Savings and Loan Association

      Beverly Hills, CA

      BGPH

      Bishop Graphics, Inc.

      Westlake Village, CA

      BRSL

      Bristol Corporation

      Elkhart, IN

      BSCO

      Burnham Service Corporation

      Columbus, GA

      CPIC

      CPI Corp.

      St. Louis, MO

      CRBRA

      Cerberonics, Inc. (Cl A)

      Bailey's Crossroads, VA

      CHMX

      Chemex Pharmaceuticals, Inc.

      Denver, CO

      COMR

      Comair, Inc.

      Cincinnati, OH

      CHRZ

      Computer Horizons Corporation

      New York, NY

      CSRE

      Comshare, Incorporated

      Ann Arbor, MI

      CPER

      Consolidated Papers, Inc.

      Wisconsin Rapids, WI

      CRMP

      Crump (E. H.) Companies, Inc.

      Memphis, TN

      DBAS

      DBA Systems, Inc.

      Melbourne, FL

      DSCP

      Datascope Corporation

      Paramus, NJ

      DATA

      Endata, Inc.

      Nashville, TN

      FFSH

      Farm Fresh, Inc.

      Norfolk, VA

      FSAW

      First Savings Association of Wisconsin

      Milwaukee, WI

      GAEO

      Galileo Electro-Opties Corporation

      Sturbridge, MA

      GMIC

      General Microwave Corporation

      Farmingdale, NY

      HCRX

      Health Care and Retirement Corporation of America

      Lima, OH

      HELE

      Helen of Troy Corporation

      El Paso, TX

      HURC

      Hurco Manufacturing Company, Inc.

      Indianapolis, IN

      JSON

      Josephson International Inc.

      New York, NY

      MSSL

      Mid-State Federal Savings and Loan Association

      Ocala, FL

      NCTY

      National City Corporation

      Cleveland, OH

      NBTY

      Natures Bounty, Inc.

      Bohemia, NY

      NWRK

      Networks Electronic Corp.

      Chatsworth, CA

      OCIL

      Ocilla Industries, Inc.

      New York, NY

      PHON

      Phone-Mate, Inc.

      Torrance, CA

      PIOS

      Pioneer-Standard Electronics, Inc.

      Garfield Heights, OH

      PWRC

      Power Conversion, Inc.

      Elm wood Park, NJ

      PWTC

      Powertec Inc.

      Chatsworth, CA

      QMSI

      Quality Micro Systems, Inc.

      Mobile, AL

      QMED

      Quest Medical, Inc.

      Carrollton, TX

      QMEDW

      Quest Medical, Inc. (wts)

      Carrollton, TX

      REIN

      Raymond Engineering, Inc.

      Middletown, CT

      RTCH

      Radiation Technology, Inc.

      Rockaway, NJ

      RHAB

      Rehab Hospital Services Corporation

      Mechanicsburg, PA

      REXN

      Rexon Incorporated

      Culver City, CA

      SCNN

      Scan-Tron Corporation

      Long Beach, CA

      SSSV

      Scientific Systems Services, Inc.

      Melbourne, FL

      SPAN

      Span-America Medical Systems, Inc.

      Greenville, SC

      VALU

      Value Line, Inc.

      New York, NY

      WCAT

      WICAT Systems, Inc.

      Orem, UT

      WINNS

      Winn Enterprises

      Fullerton, CA

      Any questions regarding this notice should be directed to Donald Bosic, Assistant Director, NASDAQ Operations, at (202) 728-8043. Questions pertaining to trade reporting rules should be directed to Steve Hickman at (202) 728-8202.

      Sincerely,

      John T. Wall
      Executive Vice President
      Member and Market Services